Delia Landscaping is considering of new 4 year project. the necessary fixed assets will cost $205,000...

Delia Landscaping is considering of new 4 year project. the necessary fixed assets will cost $205,000 and be depreciated on a 3 year MACRS and have no salvage value. the MACRS percentages each year are 33.33% 44.45% and 14.81% and 7.41% respectively. the project will have annual sales of 142,000 variable cost of 38,500 and fix cost of 13,100. the project will also require a networking capital of 3700 and will be returning to end of the project. the company has a tax rate of 35% and the project required return is 12%. What is the net present value of this project?

Solutions

Expert Solution

Delia Landscaping is considering of new 4 year project

fixed assets will cost $205,000 and be depreciated on a 3 year MACRS and have no salvage value

MACRS percentages each year are 33.33% 44.45% and 14.81% and 7.41% respectively

annual sales of 142,000

variable cost of 38,500 and

fix cost of 13,100

networking capital of 3700 and will be returning to end of the project.

tax rate of 35% and the project required return is 12%

What is the net present value of this project? NPV = $ 29722

Initial investment =

fixed assets will cost $205,000

Increase in networking capital of 3700

Net initial investment = 205000 + 3700 =208700

Cash flow statement

Years	1	2	3	4
annual sales	142000	142000	142000	142000
- variable cost	38500	38500	38500	38500
- ix cost	13100	13100	13100	13100
= Earning before tax and depr.	90400	90400	90400	90400
- Tax exp. @35%	31640	31640	31640	31640
= Earning after tax (excluding dep.)	58760	58760	58760	58760
+ Depreciation tax shield (calculation is below)	23914	31893	10626	5123
= Operating cash flow	82674	90653	69386	63883
+ Release of net working capital				3700
= Net cash flow	82674	90653	69386	67583

Depreciation tax shield Table ( under MACRS 3 Years )

Years & rate	1 = 33.33%	2 = 44.45%	3 = 14.81%	4 = 7.41%
Depreciable assets cost =	205000	205000	205000	205000
Dep. exp	68326.50	91122.50	30360.50	14637
Tax rate	35%	35%	35%	35%
*Dep. Tax shield = Dep exp. tax rate**	= 23914	= 31893	=10626	= 5123

After calculating cash flow of each years, ext calculate Present value of cash flow using discount rate 12%

PV calculation

Year	CF	PV of $1 factor @12% discounting	PV of CF
0th year	- 208700	( 1 / 1 + 12%)0 = 1	- 208700
1st year	82674	( 1 / 1 + 12%)1 = 0.8928	73816
2nd year	90653	( 1 / 1 + 12%)2 = 0.7972	72268
3rd year	69386	( 1 / 1 + 12%)3 = 0.7118	49387.58
4th year	67583	( 1 / 1 + 12%)4 = 0.6355	42950.21

NPV = PV of CF - Initial investment

NPV = ( 73816 + 72268 + 49387.58 + 42950.21 ) - 208700 = 29722

NPV = $ 29722

**Here NPV is positive, so project should accept

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $203,000 and...

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $203,000 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 $140,000, variable costs of $37,900, and fixed costs of $13,050. The project will also require net working capital of $3,650 that will be returned at the end of the project....

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $159,000 and...

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $159,000 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 $96,000, variable costs of $27,350, and fixed costs of $11,950. The project will also require net working capital of $2,550 that will be returned at the end of the project....

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....

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $163,000 and...

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $163,000 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 $100,000, variable costs of $27,450, and fixed costs of $12,050. The project will also require net working capital of $2,650 that will be returned at the end of the project....

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $183,000 and...

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $183,000 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 $120,000, variable costs of $31,900, and fixed costs of $12,550. The project will also require net working capital of $3,150 that will be returned at the end of the project....

Delia Landscaping is considering a new 4-year project. The equipment necessary would cost $173,000 and be...

Delia Landscaping is considering a new 4-year project. The equipment necessary would cost $173,000 and be depreciated on a 3-year MACRS to a book value of zero. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The project will have annual sales of $110,000, variable costs of $27,700, and fixed costs of $12,300. The project...

Emulsified Fat Offal Tube, Inc. is considering a new 4-year project. The necessary fixed assets will...

Emulsified Fat Offal Tube, Inc. 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 $3,400 that will be returned at the end...

A company is evaluating a new 4-year project. The equipment necessary for the project will cost...

A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,600,000 and can be sold for $725,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 40 percent. What is the aftertax salvage value of the equipment?

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will...

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...

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will...

Subjects