Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $779,900.00 work cell. Further, it will cost the firm $58,100.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $57,600.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,900.00. Finally, the firm will invest $10,600.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $909,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 36.00%. The work cell is estimated to have a market value of $478,000.00 at the end of the fourth year. The firm expects to reclaim 85.00% of the final NWC position. The cost of capital is 11.00%. What is the NPV the project if we end the project after 4 years? Submit Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

Answer:

NPV of Project NPV of project $584,059.49 $584,059.49

Working:

Year Purchase cost Installation cost Installed cost Training cost Equipment Working capital ($779,900) ($58,100) ($838,000) ($57,600) ($5,900) ($10,600) Sales Expenses Depreciation EBT Tax at 36% EAT Add back depreciation Annual operating cash flow $909,000 ($363,600)| ($41,900) $503,500 ($181,260) $322,240 $41,900 $364,140 $909,000 ($363,600) ($41,900) $503,500 $181,260) $322,240 $41,900 $364,140 $909,000 ($363,600)| ($41,900) $503,500 ($181,260) $322,240 $41,900 $364,140 $909,000 ($363,600) ($41,900) $503,500 ($181,260) $322, 240 $41,900 $364,140 $796,100 $754,200 $712,300 Book value of work cell Salvage value Tax on loss Salvage value with tax Recovery of NWC (85%) $670,400 $478,000 $69,264 $547,264 $9,010 Cash flow PV factor (1/(1+11%)^Year) PV of cash flows NPV ($912,100)| $364,140 $364,140 $364,140 $920,414 11 0.900900901 0.811622433 0.731191381 0.658730974 ($912,100.00) $328,054.05 $295,544.19 $266,256.03 $606,305.21 | $584,059.49