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Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for...

Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a life of 5 years. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. Ignore bonus depreciation. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 with costs of $430,000. The tax rate is 21 percent and the required rate of return is 15 percent. What is the net present value of this project?

Multiple Choice $32,026.45 $33,278.35 $34,138.25 $32,318.29 $36,202.48

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Option , $33,278.35

Workings:

Year 0 1 2 3 4 5 Total
Cash out flow -325000
Working capital (-160000-35000+100000) -95000
Annual sales 554000 554000 554000 554000 554000
Less: Costs 430000 430000 430000 430000 430000
Less: Depreciation (325000/5) 65000 65000 65000 65000 65000
EBT 59000 59000 59000 59000 59000
Less: Tax (21%) 12390 12390 12390 12390 12390
PAT 46610 46610 46610 46610 46610
Add: Depreciation 65000 65000 65000 65000 65000
OCF 111610 111610 111610 111610 111610
After tax salvage inflow 64187.50
Working capital recovery 95000
Net cash flow -420000.00 111610.00 111610.00 111610.00 111610.00 270797.50
PV Factor 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718
Discounted cash flows -420000 97052.174 84393.195 73385.387 63813.3797 134634.217

33278.35

jeff jeffy answered 2 years ago
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