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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?

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

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