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domimant retailer is considering a project whose data are shown below. revenue and cash operating expenses...

domimant retailer is considering a project whose data are shown below. revenue and cash operating expenses are expected to be constant over the roject's 5 year expected operating life annual sales revenue is 90000 and cash operating expense are 37000 per year. the new equipment cost and depeciable basis is 125,000 and it will depreciated by MACRS as 5 years property. the new equipment replaces older equipment that is fully depreciated but can be sold for 8000. in addition, the new equipment requires an additional 5000 of net operating working capital, which can be fully recovered at the end of the project. the new equipment is expected to be sold for 10995 at the end of year 5. the marginal tex rate is 28%

-what is year 3 net operating cash flow?
-what is the terminal year non-operating cash flow at the end of year 5?
-what is the NPV of the project if Dominant WACC is 12%

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Expert Solution

Time line 0 1 2 3 4 5
Proceeds from sale of existing asset =selling price* ( 1 -tax rate) 5760
Tax shield on existing asset book value =Book value * tax rate 0
Cost of new machine -125000
Initial working capital -5000
=Initial Investment outlay -124240
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.5200% 0.0576 0
Sales 90000 90000 90000 90000 90000
Profits Sales-variable cost 53000 53000 53000 53000 53000
-Depreciation =Cost of machine*MACR% -25000 -40000 -24000 -14400 -14400 7200 =Salvage Value
=Pretax cash flows 28000 13000 29000 38600 38600
-taxes =(Pretax cash flows)*(1-tax) 20160 9360 20880 27792 27792
+Depreciation 25000 40000 24000 14400 14400
=after tax operating cash flow 45160 49360 44880 42192 42192
reversal of working capital 5000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 7916.4
+Tax shield on salvage book value =Salvage value * tax rate 2016
=Terminal year after tax cash flows 14932.4
Total Cash flow for the period -124240 45160 49360 44880 42192 57124.4
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194 1.762342
Discounted CF= Cashflow/discount factor -124240 40321.429 39349.4898 31944.698 26813.779 32413.92
NPV= Sum of discounted CF= 46603.3133

jeff jeffy answered 1 year ago
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