Question

1) A project has an initial requirement of $ 260,000 for fixed assets and $16,500 for net working capital. The fixed assets will be depreciated to a zero-book value over the four-year life of the project and have an estimated salvage value of $50,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $82,500 and the discount rate is 12 percent. What is the project's net present value if the tax rate is 21 percent?

2) Great Western Southern purchased $525,000 of equipment four years ago. The equipment is seven-year MACRS property. The firm is selling this equipment today for $150,000. What is the after-tax cash flow from this sale if the tax rate is 27 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

Answer 1

Solution to the QUESTION-1

Initial Investment Cost

Initial Investment Cost = Cost of the fixed asset + Working capital required

= $260,000 + $16,500

= $276,500

Year 1-3 Cash flow = $82,500 per year

Year 4 Cash Flow = Annual cash flow + Working capital + After-tax market value

= $82,500 + $16,500 + [$50,000 x (1 – 0.21)]

= $82,500 + $16,500 + [$50,000 x 0.79]

= $82,500 + $16,500 + $39,500

= $138,500

The project's net present value

Year	Annual cash flows ($)	Present Value Factor (PVF) at 12.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	82,500	0.892857	73,660.71
2	82,500	0.797194	65,768.49
3	82,500	0.711780	58,721.87
4	1,38,500	0.635518	88,019.25
TOTAL		2,86,170.33

The Net Present Value (NPV) of the Project = Present value of annual cash inflows – Initial investment costs

= $2,86,170.33 - $276,500

= $9,670.33

“Hence, the project's net present value will be $9,670.33”

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

PLEASE BE NOTED (More than 1 Question)