Question

1. Given the following information, estimate the cash flows of this project and then compute the NPV of this project.

Estimated Sales: 50,000 units per year for each of the next 3 years

Estimate Sale Price: $1,050 per unit

Variable Cost: $1,000 per unit

Fixed Costs: $1,500,000 per year

Initial Investment in Plant and Machinery: $1,500,000 to be depreciated to a salvage value of $0 over the next three years. We sell the machine at $45000 in the market at the end of 3 years.

Additions to Net Working Capital: $50,000 at the beginning of the project

Corporate Tax Rate: 34%

Cost of capital: 18%

Sale price will go up by 10% every year

Variable cost will go up by 8% per year

What if salvage value is $45,000?

Answer 1

Cash Flow at the end of year 1,2 and 3 are $830000, $1655000 and $2660300. Calculation given below:

If we discount this cash flow @18%, then the present value becomes= 830000/(1.18)+1655000/(1.18)^2+2660300/(1.18)^3=$3511126

NPV= 3511126-Initial Investment- Net Working Capital Investment at the begining of the project=3511126-1500000-50000=$1961126

So, NPV is 1,961,126.

If the salvage value is $45000, then that will impact depreciation and thus on taxable income and on tax. In that scenario calculation is given below:

So, in this NPV would be =$1,950,037