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A company is considering a 3-year project that requires an initial installed equipment cost of $15,000....

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.)

Solutions

Expert Solution

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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