Consider an investment of $500,000 at time zero for machinery and equipment to b
ID: 2709691 • Letter: C
Question
Consider an investment of $500,000 at time zero for machinery and equipment to be depreciated using 8 year straight line depreciation starting in year 1 to year 8. Annual revenue is estimated to be $380,000 and annual operating costs of $160,000. $100,000 for working capital investment is also needed at time zero and working capital return is expected to equal the initial working capital investment at the end of the project (8th year). Salvage value of the machinery and equipment is expected to be zero. The minimum DCFROR is 12% and the effective income tax rate is 35%. Calculate DCFROR and NPV project life.
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Explanation / Answer
Answer:
Particulars 0 1 2 3 4 5 6 7 8 Investment -500000 Working capital -100000 100000 Gross earnings (380000-160000) 220000 220000 220000 220000 220000 220000 220000 220000 Less: Dep (500000/8) 62500 62500 62500 62500 62500 62500 62500 62500 Cash flow before tax 157500 157500 157500 157500 157500 157500 157500 157500 Less: Tax @35% 55125 55125 55125 55125 55125 55125 55125 55125 Cash flow after tax 102375 102375 102375 102375 102375 102375 102375 102375 Add: Dep 62500 62500 62500 62500 62500 62500 62500 62500 OCF 164875 164875 164875 164875 164875 164875 164875 164875 Net cash flow -600000 164875 164875 164875 164875 164875 164875 164875 264875 P.V.F (12%) 1 0.893 0.797 0.712 0.636 0.567 0.5066 0.4523 0.40388 Present value ($) -600000 147233.4 131405.4 117391 104860.5 93484.13 83525.68 74572.96 106977.7 NPV ($) 259450.7 IRR 10%