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You are evaluating a capital project with a Net Investment of $800,000, which includes an increase...

You are evaluating a capital project with a Net Investment of $800,000, which includes an increase in net working capital of $8,000. The project has a life of 20 years with an expected salvage value of $100,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $120,000 per year and operating expenses by $14,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 12%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

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Expert Solution

Initilal Investment = net Investment + net working capital = $800,000 + $8000 = $808,000

Depreciation = ($800,000 - $100,000) / 20 years = $35,000

Net Income = (Revenue - Operating Expenses - Depreciatio) * (1-tax rate)

= ($120,000 - $14,000 - $35,000) * (1-40%)

= $42,600

Operating Cash Flow = Net Income + Depreciation = $42,600 + $35,000 = $77,600

After tax sale value of asset = Sale value - [(Sale value - book value) * Tax rate]

= $100,000 - [($100,000 - $100,000)*40%]

= $100,000

Terminal Cash Flow = After tax sale value of asset + Recovery of net working capital

= $100,000 + $8,000 = $108,000

Calculation of NPV of the Project
Year Cash Flow Discount Factor @12% Discounted Cash Flows
A B C = 1/(1+12%)^A D = B*C
0 -808000 1 -808000
1 77600 0.892857143 69285.71429
2 77600 0.797193878 61862.2449
3 77600 0.711780248 55234.14723
4 77600 0.635518078 49316.20288
5 77600 0.567426856 44032.324
6 77600 0.506631121 39314.575
7 77600 0.452349215 35102.29911
8 77600 0.403883228 31341.33849
9 77600 0.360610025 27983.33794
10 77600 0.321973237 24985.12316
11 77600 0.287476104 22308.14568
12 77600 0.256675093 19917.98721
13 77600 0.22917419 17783.91715
14 77600 0.204619813 15878.49746
15 77600 0.182696261 14177.22987
16 77600 0.163121662 12658.24096
17 77600 0.145644341 11302.00086
18 77600 0.13003959 10091.07219
19 77600 0.116106777 9009.885887
20 185600 0.103666765 19240.5516
NPV of the Project -217175.1641
Therefore, NPV of the Project is -$217,175.16

jeff jeffy answered 2 years ago
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