Question

1- You are a part of a finance team in a firm, and you were asked by your boss to estimate the annual cash flows of a project. You estimated that the annual sales and costs of this project is $150,000 and $25,000 respectively. In order to start the project, the firm needs to invest in $300,000 in new equipment including shipping and installation, and $30,000 in working capital. The life of this asset is 3 years, and the project will be terminated after 3 years of operations. The equipment will depreciate via simplified straight-line method, and the estimated market value of the machine in 3 years is $20,000. The firm has a marginal tax rate of 22%. What is the terminal cash flow of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

2- You are evaluating a capital project for equipment with a total installed cost of $750,000. The equipment has an estimated life of 30 years, with an expected salvage value at the end of the project of $50,000. The project will be depreciated via simplified straight-line depreciation method. In addition, a working capital investment of $5,000 is required. The project replaces an old piece of equipment which is currently in service and is fully depreciated, but has an expected after-tax salvage value of $12,000. After replacing the old equipment, cash savings from decreased operating expenses are expected to amount of $200,000 per year. The firm;s marginal tax rate is 40 percent and the project cost of capital is 10%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer 1

Answer 1
Calculation of terminal cash flow of the project
	Year 3
Sale value of equipment	20,000.00
Tax @ 22% of Gain on sale of equipment	-4,400.00
Recovery of working capital	30,000.00
Terminal Cash flow of the project	45,600.00
Answer 2
Calculation of net present value of project
Year	0	1 - 29	30
Investment in equipment	-750,000
Investment in working capital	-5,000
after tax salvage value of old equipment	12,000
Recovery of working capital			5,000
Sale value of equipment			50,000
Tax @ 40% of Gain on sale of equipment			-20,000
Cash savings in Operating expenses		200,000	200,000
Tax @ 40% on Savings		-80,000	-80,000
Depreciation Tax shield		9,333	9,333
Net Cash flow	-743,000	129,333	164,333
X Discount Factor @ 10%	1.00000	9.36961	0.05731
Present Values	-743,000	1,211,799	9,418
Net present value of project	478,217
Working
Calculation of depreciation tax shield
Depreciation per year = (Cost - salvage value)/useful life = (750000 - 50000)/30 years = 23,333
Depreciatio tax shield = Depreciation per year x tax rate = 23,333 x 40% = 9,333