Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $846,700.00 work cell. Further, it will cost the firm $54,300.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $58,700.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,100.00. Finally, the firm will invest $11,800.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $916,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%.

The work cell is estimated to have a market value of $489,000.00 at the end of the fourth year. The firm expects to reclaim 86.00% of the final NWC position.

The cost of capital is 13.00%.

What is the NPV the project if we end the project after 4 years?

Answer 1

The calculations has been shown in the following excel worksheet for better understanding:-

Some points to be taken into consideration are:-

• Initial investment includes the cost of work cell, its installation cost and training cost but will not include the market value of old equipment as the firm already owns it. Additionally it requires working capital investment, so that has been added as well.
• Depreciation has been taken by divding cost of workcell with 20 years as the useful life is 20 years.
• Depreciation is added back in cash flows as it is a non-cash expense.
• Fourth year of cash flow includes amount of annual cash flow plus maket value of workcell as it is assumed to carry on the project for four years plus reclaiming of 86% of working capital amount .

The following is the formula sheet of above excel worksheet:-

So, NPV after 4 years is coming out to be $373668.90