In: Finance
The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should be able to determine a few things once you consider the following:
YEAR 1 | YEAR 2 | YEAR 3 | YEAR 4 | |
EBIT | $(3,600) | $(2,725) | $1,875 | $5,000 |
What is this project's net present value?
Time line | 0 | 1 | 2 | 3 | 4 | |
Cost of new machine | -12000 | |||||
=Initial Investment outlay | -12000 | |||||
EBIT | -3600 | -2725 | 1875 | 5000 | ||
-taxes | =(Pretax cash flows)*(1-tax) | -2628 | -1989.25 | 1368.75 | 3650 | |
+Depreciation | 3000 | 3000 | 3000 | 3000 | ||
=after tax operating cash flow | 372 | 1010.75 | 4368.75 | 6650 | ||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 2628 | ||||
+Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||
=Terminal year after tax cash flows | 2628 | |||||
Total Cash flow for the period | -12000 | 372 | 1010.75 | 4368.75 | 9278 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.085 | 1.177225 | 1.2772891 | 1.3858587 |
Discounted CF= | Cashflow/discount factor | -12000 | 342.8571 | 858.5869 | 3420.3298 | 6694.7662 |
NPV= | Sum of discounted CF= | -683.46 |