Question

A project has an initial requirement of $219,312 for new equipment and $14,180 for net working capital. The installation costs are expected to be $13,506. The fixed assets will be depreciated to a zero book value over the 4-year life of the project and have an estimated salvage value of $94,642. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $51,197 and the cost of capital is 5% What is the project's NPV if the tax rate is 36%?

Answer 1

	New Equipment	$ (219,312.00)
	Installation Cost	$    (13,506.00)
	Total Investment	$ (232,818.00)
	Year	Year 0	Year 1	Year 2	Year 3	Year 4
	Investment	$ (232,818.00)
	Operating cash flow		$    51,197.00	$    51,197.00	$    51,197.00	$    51,197.00
	Less: Depreciation=($232818/4)		$    58,204.50	$    58,204.50	$    58,204.50	$    58,204.50
	Net Income before tax		$    (7,007.50)	$    (7,007.50)	$    (7,007.50)	$    (7,007.50)
	Income Tax @36%		$    (2,522.70)	$    (2,522.70)	$    (2,522.70)	$    (2,522.70)
	Profit after Tax		$    (4,484.80)	$    (4,484.80)	$    (4,484.80)	$    (4,484.80)
	Operating cash flow		$    53,719.70	$    53,719.70	$    53,719.70	$    53,719.70
	After tax Salvage Value=($94642*64%)					$    60,570.88
	Working Capital	$    (14,180.00)				$    14,180.00
	Total Operating Cash Flow=(A)	$ (246,998.00)	$    53,719.70	$    53,719.70	$    53,719.70	$ 128,470.58
	P.V Factor 5% for 4 years=(B)	1	0.952	0.907	0.864	0.823
	P.V.=(A)*(B)	$ (246,998.00)	$    51,141.15	$    48,723.77	$    46,413.82	$ 105,731.29
	NPV=(Total of P.V of all the four years)	$        5,012.03
	NPV is possitive so company should buy new Equipment
	Working:
	Operating Cash Flow=Profit after tax+Depreciation