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The Down Towner is considering a project with a life of 4 years that will require...
The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated using the Year 2018 bonus depreciation method. At the end of the project, the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The tax rate is 24 percent and the required rate of return is 13 percent. What is the project's net present value? Multiple Choice $46,482.43 $42,316.67 $56,500.00 $59,488.87 $48,909.09
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Expert Solution
| Annual operating cahsflows | |||||||
| Sales | 195000 | ||||||
| Less: Cost | 117500 | ||||||
| Pre tax income | 77500 | ||||||
| Less: Tax @ 24% | 18600 | ||||||
| After tax income | 58900 | ||||||
| NPV: | |||||||
| Year-0 | Year-1 | Year-2 | Year-3 | Year-4 | |||
| Investment of Fixed assets | -164800 | ||||||
| Investment of Working capital | -42400 | ||||||
| Annual cash flows | 58900 | 58900 | 58900 | 58900 | |||
| Tax shield on dep | 39552 | ||||||
| (164800*0.24) | |||||||
| Release of Working capital | 42400 | ||||||
| After tax salvage | 28500 | ||||||
| (37500-24%) | |||||||
| Net cash flows | -207200 | 98452 | 58900 | 58900 | 129800 | ||
| PVF at 13% | 1 | 0.884956 | 0.783147 | 0.69305 | 0.613319 | ||
| Present value of cashflows | -207200 | 87125.66 | 46127.34 | 40820.65 | 79608.77 | ||
| NPV | 46482.43 | ||||||
| Answer is $ 46482.43 | |||||||
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