Question

You are considering a new investment. Revenues, costs and spending on Net Working Capital are given in the table below. The tax rate is 35%. All net working capital is recovered at the end of the project. Year 1 Year 2 Year 3 Year 0 Investment $30,000 Sales Revenue Operating Costs Depreciation Net Working Capital Spending $400 $16,000 $3,000 $10,000 $450 $17,000 $3,200 $10,000 $350 $18,000 $3,400 $10,000 ? Suppose that the discount rate is 11.5 percent. What is the NPV of the project? Select one: a. -3225.66 b. 3383.82 c. 30299.39 d. 3510.31 e. -100.61

Answer 1

Prpare the table to compute the Net Present Value as follows:

D 1 А B с E 1 Net Present Value 2 Year 0 2 3 3 Sales Revenue 16000 17000 18000 4 Less: Operating cost -3000 -3200 -3400 5 Less: Depreciation -10000 -10000 -10000 6 Profit before tax =SUM(C3:C5) =SUMD3:D5) =SUM(E3:E5) 7 Less: Tax @35% =-C6*0.35 =-D6*0.35 =-E6*0.35 8 Profit after tax =SUM(C6:C7) =SUMD6:D) =SUM(E6:E7) 9 Add: Depreciation 10000 10000 10000 10 Operating Cashflows =SUM(C8:09) =SUM(D8:D9) =SUMES:E9) 11 Less: Net working Capital spending -400 -450 |-350 12 Add: Net working capital recovered =400+450+350 13 Investment |-30000 14 Net Cash flows =SUMB11:B13) =SUM(C10:C11) =SUMD10:D11) =E10+E12 15 Present value factor @11.5% =1/(1+11.5%) 0 =1/(1+11.5%)^1 =1/(1+11.5%)^2 =1/(1+11.5%)^3 16 Present value of cash flows =B14*B15 C14*C15 =D14*D15 =E14%E15 17 Net Present Value =SUM(B16:E16)

The result of the above table is as follows:

A 1 2 Year 3 Sales Revenue 4 Less: Operating cost 5 Less: Depreciation 6 Profit before tax 7 Less: Tax @35% 8 Profit after tax 9 Add: Depreciation 10 Operating Cashflows 11 Less: Net working Capital spending 12 Add: Net working capital recovered 13 Investment 14 Net Cash flows 15 Present value factor @11.5% 16 Present value of cash flows 17 Net Present Value B C D E Net Present Value 2 3 $16.000 $17,000 $18,000 ($3,000) ($3,200) ($3,400) ($10,000) ($10.000) ($10,000) $3,000 $3.800 $4,600 ($1,050)| ($1,330) ($1,610) $1,950 $2,470 $2.990 $10,000 $10,000 $10,000 $11.950 $12,470 $12.990 ($400) ($450) ($350) $1,200 ($30,000) ($30,400) $11,500 $12.120 $14.190 1 0.896860987 0.804359629 0.721398771 ($30,400) $10,314 $9,749 $10.237 ($100.611)

Hence, the net present value is $-100.61. (Option e)