Question

2.Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's Initial Cash Outlay at time 0? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.
	WACC											11.0%
	Net investment in fixed assets (depreciable basis)											$70,000
	Required new working capital											$10,000
	Sales revenues, each year											$95,000
	Cash operating costs excl. depr'n, each year											$30,000
	Expected pretax salvage value											$9,000
	Tax rate											30.0%

3.Using the information from problem 2 on Large Manufacturing, Inc., what is the Year 1

Net Operating Cash Flow? Enter your answer rounded to two decimal places. Do not

enter $ or comma in the answer box. For example, if your answer is $12,300.456 then

enter as 12300.46 in the answer box.

4.Using the information from problem 2 on Large Manufacturing, Inc., what is the

Terminal Year Non–Operating Cash Flow at the end of Year 3? Enter your answer

rounded to two decimal places. Do not enter $ or comma in the answer box. For

example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

5. Using the information from problem 2 on Large Manufacturing, Inc., what is the

project’s NPV? Enter your answer rounded to two decimal places. Do not enter $ or

comma in the answer box. For example, if your answer is $12,300.456 then enter as

12300.46 in the answer box.

Answer 1

2. Net investment in Fixed Assets = 70000

Required net working capital = 10000

Projects initial cash outlay at time 0 = Net investment in fixed assets + Required net working capital = 70000 + 10000 = 80000

3. Depreciation under MACRS = rate x net investment in fixed assets

Under MACRS 3 year class, For year 1 rate = 33.33% . So Depreciation = 70000 x 33.33% = 23331.00

Similarly depreciation can be calculated for other years using rates for respective years.

Depreciation under 3 year class life
Year	1	2	3
Rate	33.33%	44.45%	14.81%
Depreciation	23331.00	31115.00	10367.00

Net Operating cash flow = (Sales - Costs - Depreciation)(1-tax rate) + Depreciation

Net operating cash flow for year 1 = (95000 - 30000 - 23331)(1-30%) + 23331 = 41669(1-30%) + 23331 = 29168.30 + 23331 = 52499.30

Net operating cash flow for year 2 = (95000 - 30000 - 31115)(1-30%) + 31115 = 33885(1-30%) + 31115 = 23719.50 + 31115 = 54834.50

Net operating cash flow for year 3 = (95000 - 30000 - 10367)(1-30%) + 10367 = 54633(1-30%) + 10367 = 38243.10 + 10367 = 48610.10

4. Book value of fixed asset of year 3 = Net investment in fixed asset - sum of depreciations for years 1 to 3

= 70000 - (23331 + 31115 + 10367) = 70000 - 64813 = 5187

Terminal year non operating cash flow = Salvage value of fixed asset at the end of year 3 + Recovery of net working capital + Tax on gain from sale of fixed asset

= Salvage value of fixed asset at the end of year3 + Recovery of net working capital + Tax rate(Salvage value of fixed asset at the end of year 3 - Book value of fixed asset at the end of year 3)

= 9000 + 10000 + 30%(9000-5187)

= 19000 + 30% x 3813 = 19000 + 1143.90 = 20143.90

Terminal year non operating cash flow = 20143.90

5. NPV = -Initial cash outlay at time 0 + Sum of present value of net operating cash flows from year 1 to 3 discounted at WACC + Present value of terminal non operating cash flow discounted at WACC

= -80000 + 52499.30/(1+11%) + 54834.50/(1+11%)² + 48610.10/(1+11%)³ + 20143.90/(1+11%)³

= -80000 + 47296.666 + 44504.910 + 35543.286 + 14729.046

= 62073.908 = 62073.91 (rounded to two places off decimal)

NPV of project = 62073.91