Question

In: Finance

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.

Solutions

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.


Related Solutions

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%....
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%....
You are evaluating a capital project with a Net Investment of $400,000, which includes an increase...
You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 15%....
You are evaluating a capital project with a Net Investment of $400,000, which includes an increase...
You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 15%....
You are evaluating a capital project with a Net Investment of $95,000, which includes an increase...
You are evaluating a capital project with a Net Investment of $95,000, which includes an increase in net working capital of $5,000. The project has a life of 9 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $20,000 per year and operating expenses by $4,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 8%....
1- You are evaluating a capital project with a Net Investment of $400,000, which includes an...
1- You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is...
Which methods of evaluating a capital investment project use cash flows as a measurement basis?
Which methods of evaluating a capital investment project use cash flows as a measurement basis? Net present value, accounting rate of return, and internal rate of return. Internal rate of return, payback period, and accounting rate of return. Accounting rate of return, net present value, and payback period. Payback period, internal rate of return, and net present value. Net present value, payback period, accounting rate of return, and internal rate of return.
KK Enterprises is evaluating a project with the following characteristics: Fixed capital investment is $2,000,000. The...
KK Enterprises is evaluating a project with the following characteristics: Fixed capital investment is $2,000,000. The project has an expected six-year life. The initial investment in net working capital is $200,000. At the end of each year, net working capital must be increased so that the cumulative investment in net working capital is one-sixth of the next year’s projected sales. The fixed capital is depreciated 30 percent in year 1, 35 percent in year 2, 20 percent in year 3,...
The capital budgeting director of Global Products, Inc. is evaluating a new project that would increase...
The capital budgeting director of Global Products, Inc. is evaluating a new project that would increase revenues by $60,000 per year. Associated annual related expenses for this project are estimated at $30,000. The projected cost of the project is $50,000. The project anticipates the immediate need of $10,000 in net operating working capital that should be recaptured at the end of the project’s three-year life. The marginal tax rate is 21%. The firm plans to depreciate the project using MACRS....
SafeElectrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The...
SafeElectrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. Net working capital is zero. What is the annual cash flow for this project? $3,300 $17,900 $20,000 $18,300 $28,200
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT