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3. Hyper Mega Awesome Value Inc. is evaluating a project proposal. The project is expected to...

3. Hyper Mega Awesome Value Inc. is evaluating a project proposal. The project is expected to require purchasing long-term assets with an installed cost of $400,000. It will also require an increase in Net Working Capital of $25,000. At the end of the 4th year, the project will be terminated. Selling the assets will result in an after-tax gain of $15,000. The project is expected to generate annual after-tax operating cash flows of $160,000 each year for 4 years. Hyper Mega Awesome Value Inc requires a return on capital projects of 11%. Should they make the investment?

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Expert Solution

Time line 0 1 2 3 4
Cost of new machine -400000
Initial working capital -25000
=Initial Investment outlay -425000
after tax operating cash flow 160000 160000 160000 160000
reversal of working capital 25000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 15000
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 40000
Total Cash flow for the period -425000 160000 160000 160000 200000
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631 1.5180704
Discounted CF= Cashflow/discount factor -425000 144144.1 129859.6 116990.62 131746.19
NPV= Sum of discounted CF= 97740.5493

Accept project as NPV is positive

jeff jeffy answered 1 year ago
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