Question

A company is considering a 3-year project that requires an initial installed equipment cost of $15,000. The project engineer has estimated that the operating cash flows will be $5,000 in year 1, $7,000 in year 2, and $9,000 in year 3. The new machine will also require a parts inventory of $3,000 at the beginning of the project (assume this inventory can be sold for cost at the end of the project). It is also estimated that the equipment can be sold as salvage for an after tax salvage cash flow of $4,000 at the end of the project. If the tax rate is 27% and the required rate of return is 10%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Answer 1

Using excel formula

		A	B	C	D
	Year	0	1	2	3
1	Initial Invetsment	15000
2	Initial Inventory cost	3000
3	Pretax Operating Costs Savings		$                       5,000.00	$            7,000.00	$            9,000.00
4	Depreciation		5000.00	5000.00	5000.00
5	EBIT= Cost Savings-Depreciation		0.00	2000.00	4000.00
6	Tax =EBIT*Tax rate		0	540	1080
7	EAT		0.00	1460.00	2920.00
8	Add Depreciation		5000.00	5000.00	5000.00
9	Add After Tax Salvage Value				2920	(4000*(1-27%))
10	Add Recovery of Working Capital				3000
11	Free Cash Flow	-18000	5000.00	6460.00	13840.00
	NPV	$2,282.49	Using excel formula =NPV(10%,B11:D11)+A11

NPV = 2282

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