Foley Systems is considering a new investment whose data are shown below. The eq
ID: 2651022 • Letter: F
Question
Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.)
12.0%
$75,000
$15,000
33.333%
$79,000
$25,000
35.0%
Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.)
12.0%
$75,000
$15,000
33.333%
$79,000
$25,000
35.0%
$30,318
$26,898
$23,543
$25,997
$28,169
WACC12.0%
Net investment in fixed assets (basis)$75,000
Required net operating working capital$15,000
Straight-line depreciation rate33.333%
Annual sales revenues$79,000
Annual operating costs (excl. depr.)$25,000
Tax rate35.0%
Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.)
WACC12.0%
Net investment in fixed assets (basis)$75,000
Required net operating working capital$15,000
Straight-line depreciation rate33.333%
Annual sales revenues$79,000
Annual operating costs (excl. depr.)$25,000
Tax rate35.0%
$30,318
$26,898
$23,543
$25,997
$28,169
Explanation / Answer
Solution -
NPV ( Net Present Value ) is the difference between the present value of cash inflows and the present value of cash outflows. Below is the calculation for present value of cash flow -
Note - 1 - Depreciation is considered for calculation of Profit and Taxes however added back as it is not a cash flow
Note - 2 - Refer PV table for Present value factor
NPV = present value of cash inflows and the present value of cash outflows
NPV = -90000 + 39152+34957+41888
NPV = $25997
Year 0 1 2 3 a Investment in equipment -75000 b Investment in net working capital to be recovered at the end -15000 c Sales revenues 79000 79000 79000 d Operating costs (excl. deprec.) 25000 25000 25000 e Depreciation @ 33.33% of $75000 Straight Line Method 25000 25000 25000 f Operating income (EBIT) ( c-d-e) 29000 29000 29000 g Taxes Rate @ 35% of F 10150 10150 10150 h After-tax EBIT ( f-g) 18850 18850 18850 e Depreciation Depreciation to add back 25000 25000 25000 i Cash flow from operations ( h+e ) -90000 43850 43850 43850 j Recovery of working capital recovered 15000 k Total cash flows Actual Cash Flow (i+j) -90000 43850 43850 58850 l PV factor @10% WACC = 10% 1 0.8929 0.7972 0.7118 p Present Value of Future Cash flow -90000 39152 34957 41888.3