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.

What is the NPV of this project?

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-166994
=Initial Investment outlay		-166994
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