Question

Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $167,000, would be depreciated on a straight-line basis over its 6-year life, and would have a zero salvage value. The sales would be $84,000 a year, with variable costs of $27,400 and fixed costs of $12,000. In addition, the firm anticipates an additional $15,300 in revenue from its existing facilities if the putt putt course is added. The project will require $2,600 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 40 percent?

Answer 1

Time line		0	1	2	3	4	5	6
Cost of new machine		-167000
Initial working capital		-2600
=Initial Investment outlay		-169600
Sales			99300	99300	99300	99300	99300	99300
Profits	Sales-variable cost		71900	71900	71900	71900	71900	71900
Fixed cost			-12000	-12000	-12000	-12000	-12000	-12000
-Depreciation	Cost of equipment/no. of years		-27833.3333	-27833.3333	-27833.33	-27833.33	-27833.33	-27833.33
=Pretax cash flows			32066.66667	32066.66667	32066.667	32066.667	32066.667	32066.667
-taxes	=(Pretax cash flows)*(1-tax)		19240	19240	19240	19240	19240	19240
+Depreciation			27833.33333	27833.33333	27833.333	27833.333	27833.333	27833.333
=after tax operating cash flow			47073.33333	47073.33333	47073.333	47073.333	47073.333	47073.333
reversal of working capital								2600
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								2600
Total Cash flow for the period		-169600	47073.33333	47073.33333	47073.333	47073.333	47073.333	49673.333
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928	1.5735194	1.7623417	1.9738227
Discounted CF=	Cashflow/discount factor	-169600	42029.7619	37526.57313	33505.869	29915.954	26710.674	25166.057
NPV=	Sum of discounted CF=	25254.8883