Please help me with the following A firm has a tax rate of 25%, and a cost of ca
ID: 2647568 • Letter: P
Question
Please help me with the following
A firm has a tax rate of 25%, and a cost of capital of 10% and produces action figures. Its Free Cash Flows fomr year 0-3 are -10,11,11,9 respectively. Suppose than in adtion to the FCF the firm requires a warehpuse that costs 8 millions today and will be depreciated in a straight line in years 1-2. Although iw will be fully depreciated the equipment will have a market value of 4 million in year 3 after the figure is discontinued. Calculate the Net Present Value of the action figure.
Explanation / Answer
Statement showing calculation of NPV Project Kilo Particulars Time PVF@10% Amount PV Initial Investment 0.00 1.0000 (10,000,000.00) (10,000,000.00) Initial Investment 0.00 1.0000 (8,000,000.00) (8,000,000.00) PV of Cash Outflows (18,000,000.00) Cash Inflows 1.00 0.9091 11,000,000.00 10,000,000.00 Cash Inflows 2.00 0.8264 11,000,000.00 9,090,909.09 Cash Inflows 3.00 0.7513 9,000,000.00 6,761,833.21 Tax savings on depreciation (8,000,000*.25/2) 1.00 0.9091 1,000,000.00 909,090.91 Tax savings on depreciation (8,000,000*.25/2) 2.00 0.8264 1,000,000.00 826,446.28 Salvage value net of tax(4,000,000*.75) 3.00 0.7513 3,000,000.00 2,253,944.40 PV of Cash Inflows 29,842,223.89 NPV 11,842,223.89 Time PVF Working Notes 1.00 0.9091 1/1.10 2.00 0.8264 .9091/1.10 3.00 0.7513 .8264/1.15