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You are evaluating a capital project with a Net Investment of $800,000, which includes an increase...

You are evaluating a capital project with a Net Investment of $800,000, which includes an increase in net working capital of $8,000. The project has a life of 20 years with an expected salvage value of $100,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $120,000 per year and operating expenses by $14,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 12%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

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Expert Solution

Answer: Depreciation yearly = (Investment value- salvage value)/ (No of years) = (800000-100000) /20 = 35000

Present value Formula = Cash Flow/(1+ Discount rate) ^(no of years)

Discount rate = 12%

Tax rate = 40%

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Initial Investment -800000
Working Capital Increase -8000 8000
Salvage Value 100000
Revenues 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000
Operating Expenses 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000
Gross Income (revenue - Expenses) 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000 106000
Depreciation 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000 35000
Taxable Income (Gross Income - Dep) 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 71000 179000
Tax (40% * taxable Income) 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 28400 71600
Net Income 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 42600 107400
Cash Flow(Add back Depreciation) -808000 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 77600 142400
Present value (Cash Flow/(1+0.12)^no of years -808000 69285.71 61862.24 55234.15 49316.2 44032.32 39314.58 35102.3 31341.34 27983.34 24985.12 22308.15 19917.99 17783.92 15878.5 14177.23 12658.24 11302 10091.07 9009.886 14762.15
NPV (Sum of all present values) -221653.57

Net present value is coming out to be -221653.57. Negative value represents that it is not beneficial for us to Opt for the project.

jeff jeffy answered 1 year ago
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