GnuYak Industries is considering a new project that will last for three years. This project requires...

GnuYak Industries is considering a new project that will last for three years. This project requires an initial investment in a machine that costs £90,000 immediately (year 0) and will be depreciated in straight line over its three-year life to a residual value of 0. The management expects this project will result in sales of £100,000 and cost of goods sold will be 50% of sales each year. This project also requires a total net working capital of £10,000 in year 0 which will be fully recovered in year 3. GnuYak is in the 35% corporate tax bracket.

a. Calculate the total Free Cash Flows for each year of this new project.

b. Suppose that the appropriate discount rate for this project is 10%, calculate the NPV of this project.

Solutions

Expert Solution

Time line		0	1	2	3



Cost of new machine		-90000
Initial working capital		-10000
=Initial Investment outlay		-100000


Sales			100000	100000	100000
Profits	Sales-variable cost		50000	50000	50000


-Depreciation	Cost of equipment/no. of years		-30000	-30000	-30000

=Pretax cash flows			20000	20000	20000
-taxes	=(Pretax cash flows)*(1-tax)		13000	13000	13000
+Depreciation			30000	30000	30000
=a. FCF			43000	43000	43000

reversal of working capital					10000


+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					10000

Total Cash flow for the period		-100000	43000	43000	53000
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-100000	39090.90909	35537.19	39819.684
b. NPV=	Sum of discounted CF=	14447.78

jeff jeffy answered 8 months ago

Next > < Previous

Related Solutions

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany...

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues in $) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 -...

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany...

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 =...

A firm is considering a new project that costs $10,000 that will last 5 years and...

A firm is considering a new project that costs $10,000 that will last 5 years and will have no salvage value. The project would save $3,000 per year in salaries and would be financed with a loan that will accrue interest costs of 15% per year. The firm’s tax rate is 40%, its cost of capital is 20%, and the firm will use the straight-line method of depreciation. What is the NPV of the project? Should the firm invest in...

Calculating Project NPV; Considering a a new three year expansion project that requires an initial fixed...

Calculating Project NPV; Considering a a new three year expansion project that requires an initial fixed asset investment of $1.65million. The fixed asset will be depreciated straightline to zero over its three year tax life adfter which it will be worthless. The project is estimated to generate $1.24million in annual sales, with costs of $485,000. The tax rate is 35% and the required return is 12%. What is the NPV? Calculating project cashflow from assets; iN THE PREVIOUS PROBLEM SUPPOSE...

Merry Industries is considering a new piece of equipment for a project lasting 10 years with...

Merry Industries is considering a new piece of equipment for a project lasting 10 years with details as shown below. The costs and benefits are expected to keep increasing with the inflation rate even when a new machine is put into operation. Taking these into account, what is the annual worth that the company can expect from the machine? Initial cost $65,000 MARR 12% p y c y Inflation rate 3% p y c y Life 7 years Project life...

Merry Industries is considering a new piece of equipment for a project lasting 10 years with...

Merry Industries is considering a new piece of equipment for a project lasting 10 years with details as shown below. The costs and benefits are expected to keep increasing with the inflation rate even when a new machine is put into operation. Taking these into account, what is the annual worth that the company can expect from the machine? Initial cost $245,000 MARR 18% p y c y Inflation rate 6% p y c y Life 7 years Project life...

Company C is considering a new project that is expected to last for 5 years. Its...

Company C is considering a new project that is expected to last for 5 years. Its marketing group expects annual sales of $40 million for the first year, increasing by $10 million per year for the following four years. Manufacturing costs (i.e., COGS) and operating expenses (excluding depreciation) are expected to be 40% of sales and $7 million, respectively, from years 1-5. Developing the product will require upfront R&D and marketing expenses of $8 million total in period 0. The...

Two Part Question A) A company is considering a new three-year expansion project that requires an...

Two Part Question A) A company is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return on the project is 15 percent. What is the project’s NPV? B)...

Firm AAA is considering a new three-year new project that requires an initial fixed asset investment...

Firm AAA is considering a new three-year new project that requires an initial fixed asset investment of $2.28 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,120,000 in annual sales, with costs of $745,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 at the end...

Calculating Project NPV Down Under Boomerang, Inc., is considering a new three-year expansion project that requires...

Calculating Project NPV Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3,950,000. The fixed asset will be depreciated straight-line to zero over its three -year tax life, after which time it will be worthless. The project is estimated to generate $3,175,000 in annual sales, with costs of $1,455,000. The tax rate is 35 percent and the required return is 10 percent. What is the Project's NPV?

Subjects