Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $792,100.00 work cell. Further, it will cost the firm $52,700.00 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 $66,000.00. 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 $7,400.00. Finally, the firm will invest $11,200.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $915,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 36.00%.

The work cell is estimated to have a market value of $492,000.00 at the end of the fourth year. The firm expects to reclaim 82.00% of the final NWC position.

The cost of capital is 15.00%.

What is the cash flow to start the project in year 0, the yearly operating cash flow, terminal cash flow, and the NPV the project if we end the project after 4 years?

Answer 1

Answer 1
Calculation of the cash flow to start the project in year 0
	Year 0
Purchase cost of work cell	-$792,100.00
Delivery and installation cost of work cell	-$52,700.00
Employee Training cost	-$66,000.00
Investment in net working capital	-$11,200.00
Cash flow in Year 0	-$922,000.00
Answer 2
Calculation of the yearly operating cash flow for the project
	Yearly Operating Cash flow
Sales	$915,000.00
Less : Expenses (40% of sales)	$366,000.00
Less : Depreciation - Work cell	$42,240.00
Profit before tax	$506,760.00
Less : Tax @ 36%	$182,433.60
Add : Depreciation - Work cell	$42,240.00
Operating Cash flow	$366,566.40
Answer 3
Calculation of the terminal cash flow for the project
	Terminal Cash flow
Recovery of net working capital [82% of $11,200]	$9,184.00
After tax sale value of work cell (refer working)	$558,182.40
Terminal cash flow for the project	$567,366.40
Answer 4
Calculation of NPV of the project
Year	Cash flow	Discount Factor @ 15%	Present Value
0	-$922,000.00	1	-$922,000.00
1	$366,566.40	0.869565	$318,753.39
2	$366,566.40	0.756144	$277,176.86
3	$366,566.40	0.657516	$241,023.36
4	$933,932.80	0.571753	$533,979.11
NPV of the project			$448,932.72
Working
Depreciation per year on work cell = Installed Cost / useful life = [$792100 + $52700]/20 years = $42,240
Calculation of after tax sale value of work cell in the 4th year
Sale value of work cell	$492,000.00
Less : Book value of work cell [$8,44,800 - $1,68,960]	$675,840.00
Loss on sale of work cell	-$183,840.00
Tax benefit @ 36% of Loss	$66,182.40
After tax sale value of work cell [Sale value + Tax benefit]	$558,182.40