Question

1. You are considering bidding on a project to make new cases for mobile phones. The project details include:
   • Upfront costs of $350,000 for a new injection-moulding machine.
   • 4 year life
   • $30,000 in yearly pre-tax operating costs
   • Initial investment of $50,000 in working capital
   • Your company has a tax rate of 30%
   • Your company's required rate of return is 10%
   • At the end of 4 years you can sell the equipment for $30,000
   • There is no depreciation consideration for this equipment

1. Complete the following table and calculate the net present value for the project costs.

		Year
Cash Flows	PV	0	1	2	3	4
EAC
NPV

Answer 1

Cash outflow in year 0 = upfront cost + Investment in working capital

Cash outflow in years 1 to 3 = after tax operating costs

Cash outflow in year 4 =  after tax operating costs - terminal cash flow

terminal cash flow = salvage value + Recovery of working capital

Present value of each cash flow = cash flow / (1 + required return)n

where n = number of years after which the cash flow occurs

NPV = sum of present values of cash flows

NPV = -$227,512

EAC = (NPV * r) / (1 - (1 + r)-n)

where r = required return

n = life of project in years

EAC = -$71,774