Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $193,000 and...

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $193,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $130,000, variable costs of $34,900, and fixed costs of $12,800. The project will also require net working capital of $3400 that will be returned at the end of the project. The company has a tax rate of 34 percent and the project's required return is 14 percent. What is the net present value of this project?

A. $16,336

B. $13,314

C. $11,680

D. $14,948

E. $10,706

Expert Solution

Time line		0	1	2	3	4



Cost of new machine		-193000
Initial working capital		-3400
=Initial Investment outlay		-196400

3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Sales			130000	130000	130000	130000
Profits	Sales-variable cost		95100	95100	95100	95100
Fixed cost			-12800	-12800	-12800	-12800
Operating cost			0	0	0	0
-Depreciation	=Cost of machine*MACR%		-64326.9	-85788.5	-28583.3	-14301.3

=Pretax cash flows			17973.1	-3488.5	53716.7	67998.7
-taxes	=(Pretax cash flows)*(1-tax)		11862.246	-2302.41	35453.022	44879.142
+Depreciation			64326.9	85788.5	28583.3	14301.3
=after tax operating cash flow			76189.146	83486.09	64036.322	59180.442

reversal of working capital						3400


+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						3400

Total Cash flow for the period		-196400	76189.146	83486.09	64036.322	62580.442
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544	1.6889602
Discounted CF=	Cashflow/discount factor	-196400	66832.584	64239.8353	43222.693	37052.645
NPV=	Sum of discounted CF=	14947.7584

answer is D

jeff jeffy answered 2 years ago

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