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 | ||||
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 | ||||
1- You are a part of a finance team in a firm, and you were asked...
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...
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...
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