Question

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will be depreciated straight-line to a zero book value over the ten years. At the end of the project, the fixed assets can be sold for 15 percent of their original cost. The project is expected to generate annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the net present value of the project? $8,523.72 $7684.69 $9,579.78 $10,599.28

Answer 1

Answer is $ 8523.72
Explanation:
Annual Operating Cash flows:
Annual sales revenue		9,28,000
Less: Annual cost		7,21,000
Less: Depreciation		85000.0	(850,000/10)
Net Income before tax	1,22,000.0
Less: Tax @ 35%		42700
After tax Income		79,300.0
Add: Depreciation		85000
Annual Operating Cash flows:	1,64,300.0
After tax Sales value
Sales value at the end	127500	(850,000*15%)
Less: Book Value of assets	0
Gain on sale of assets	127500
tax @ 35%		44625
After tax sales value = 127,500-44,625 =	82875
Net Present Value at 14.60%:
Annual Operating cash flows		1,64,300
Multiply: Annuity PVF at 14.60% for 10 yrs	5.09624
Present value of Annual OCF			837312.2
After tax sales value			82875
Multiply: PVF at 14.60% for 10th year	0.255949
Present value of After tax sales value		21211.77
Total Present value of inflows			858524
Less: Initial investment			850000
Net Present value at 14.60%			8524