Question

Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would be used has a 3-year tax life and would be depreciated by the straight line method over the project's 3-year life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? (Please be sure to show your calculations.) (2 points)

Hurdle Rate 10%

Net initial investment $60,000

Initial increase in NOWC $10,000

Salvage value $10,000

Sales revenues $70,000

Operating costs excluding depreciation $30,000

Tax rate 40%

Answer 1

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Investment in Fixed Asset	-60000
Investment in Working Capital	-10000
Net Investment (A)	-70000
Operating Cash Flows
Annual Sales (B)		70000	70000	70000
Less: Operating Costs (C )		30000	30000	30000
Less: Depreciation (D) $60,000 / 3 years		20000	20000	20000
Profit Before Tax (E = B-C-D)		20000	20000	20000
Less: Tax @40% (F = E*40%)		8000	8000	8000
Profit After Tax (G)		12000	12000	12000
Add back Depreciation (H = D)		20000	20000	20000
Net Operating Cash Flows (I = G+H)		32000	32000	32000
Terminal Value
Salvage value of Fixed Asset				10000
Less: Tax @40%				2200
After Tax Salvage Value of Fixed Asset				7800
Recovery of Net Working Capital				10000
Net Terminal Value (C )				17800
Total Cash Flows (D = A+B+C)	-70000	32000	32000	49800
Discount Factor @10% (E ) 1/(1+10%)^n n=0,1,2,3	1	0.909091	0.826446	0.751315
Discounted Cash Flows (F = D*E)	-70000	29090.91	26446.28	37415.48
NPV of the Project	22952.66717

Therefore, Project's NPV is $22,952.67