Question

Crafter's Supply is considering a new three-year expansion project that requires an initial fixed asset investment of $1,400,000. The equipment will be depreciated using 5-year MACRS and will be sold at the end of the project for $190,000. The project will generate $900,000 in annual sales with costs of $180,000. The project will require an additional investment in net working capitak if $75,000. Their tax rate is 20 percent and their required return is 16 percent.

YR. 5 YR MACRS%

1. 20.00

2. 32.00

3. 19.20

4. 11.52

5. 11.52

6. 5.76

What is the NPV?

Answer 1

	MARC depreciation
	Year	1	2	3
	Rate	20.00%	32.00%	19.00%
	Depreciation	280000	448000	266000
	Post tax salvage value
	Book value =	406000
	Sales price	190000
	Loss on sale	-216000
	Tax on loss	-43200
	Post tax salvage value	233200
	Computation of NPV
	year	0	1	2	3
	Initial investment	(1,400,000)
	Working capital	(75,000)			75,000
	Operating cash flow
	Increase in contribution (900000-180000)	720,000.00	720,000.00	720,000.00
	depreciation		280,000.00	448,000.00	266,000.00
	Profit before tax		440,000.00	272,000.00	454,000.00
	Tax @ 20%		88,000.00	54,400.00	90,800.00
	Net income		352,000.00	217,600.00	363,200.00
	Operating cash flow(income+dep)		632,000.00	665,600.00	629,200.00
	Post tax salvage value				233200
	Net cash flow	(1,475,000.00)	632,000.00	665,600.00	937,400.00
	PVIF @ 16%	1	0.862068966	0.743162901	0.640657674
	Present value	(1,475,000.00)	544,827.59	494,649.23	600,552.50	165,029.32
	NPV =	165,029.32