Question

An analyst has created estimates for a new Putt Putt course near the local elementary school. The course will require an investment (building and equipment) at year 0 of $166,994.00. This amount can be depreciated over 5 years using the straight-line approach. The building can be sold for an NSV of $42,903.00 in year 5. The entrepreneur needs help estimating the cash flows for the business.

	0	1	2	3	4	5
Sales		$70,191.00	$70,191.00	$70,191.00	$70,191.00	$70,191.00
Expenses		$30,000.00	$30,000.00	$30,000.00	$30,000.00	$30,000.00
Depreciation		$33,398.80	$33,398.80	$33,398.80	$33,398.80	$33,398.80
Investment in NWC		$1,036.00	$0	$0	$0	$0

The investor wants an 9.00% return on the investment and the firm faces a 35.00% tax rate.

a) What is the project cash flow for year 1?

b) What is the project cash flow for year 2?

c) What is the NPV of this project?

Answer 1

Sales			70191	70191	70191	70191	70191
Profits	Sales-variable cost		40191	40191	40191	40191	40191
-Depreciation	Cost of equipment/no. of years		-33398.8	-33398.8	-33398.8	-33398.8	-33398.8
-working capital to be maintained			-1036	0	0	0	0
=Pretax cash flows			5756.2	6792.2	6792.2	6792.2	6792.2
-taxes	=(Pretax cash flows)*(1-tax)		3741.53	4414.93	4414.93	4414.93	4414.93
+Depreciation			33398.8	33398.8	33398.8	33398.8	33398.8
=after tax operating cash flow			37140.33	37813.73	37813.73	37813.73	37813.73
reversal of working capital							1036
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						27886.95
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							28922.95
Total Cash flow for the period		-166994	37140.33	37813.73	37813.73	37813.73	66736.68
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.4115816	1.538624
Discounted CF=	Cashflow/discount factor	-166994	34073.697	31827.06	29199.138	26788.2	43374.26
NPV=	Sum of discounted CF=	-1731.6425

year 1 cash flow =  37140.33

year 2 cash flow = 31827.06

NPV=

-1731.6425