Question

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $173,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $110,000, variable costs of $27,700, and fixed costs of $12,300. The project will also require net working capital of $2,900 that will be returned at the end of the project. The company has a tax rate of 40 percent and the project's required return is 12 percent. What is the net present value of this project?

• $5,553

• $10,238

• $6,058

• $9,180

• $7,619

Answer 1

Year 1 Year 2 Year 3 Year 4 NPV Year 0 (173,000) (2,900)| Particulars Initial Investment Net Working Capital Cash Flows from operations Net Cash Flow Discount Factor Discounted Cash flow (175,900) 65,064 65,064 0.89286 58,093 72,759 72,759 0.79719 58,003 2,900 52,249 47,128 52,249 150,028 0.71178 0.63552 37,189 31,794 (175,900) 9,180

NPV = Discounted Cash Inflows - Discounted cash outflows.

Therefore, NPV = $9,180

Particulars Sales Less: Variable Cost Less: Fixed Cost Less: Depreciation Cash flow before tax Tax Rate Tax Cash flow after tax Add Back depreciation Cash flow from operation Cash Flows from operations Year 1 Year 2 Year 3 Year 4 110,000 110,000 110,000 110,000 27,700 27,700 27,700 27,700 12,300 12,300 12,300 12,300 57,661 76,899 25,621 12,819 12,339 (6,899) 44,379 57,181 40% 40% 40% 40% 4,936 (2,759) 17,751 22,872 7,403 (4,139) 26,627 34,308 57,661 76,899 25,621 12,819 65,064 72,759 52,249 47,128

Calculation of Depreciation Year MACRS Cost of Asset AWNE Depreciation (Cost * MACRS) 57661 76899 25621 12819 173000 33.33% 44.45% 14.81% 7.41% 100.00% 173000

Discount Factor Formula:

Discount Factor = 7 (1 + i)"

Where,
i = rate of return (12%)
n = number of periods (0,1,2,3,4)