In: Finance
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.
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 |