Consider the following project of Hand Clapper, Inc. The company is considering
ID: 2718955 • Letter: C
Question
Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.5 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,050,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.9 million in pretax revenues with $5.6 million in total pretax operating costs. The tax rate is 38 percent and the discount rate is 13 percent. The market value of the equipment over the life of the project is as follows:
Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Compute the project NPV assuming the project is abandoned after one year. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Compute the project NPV assuming the project is abandoned after two years. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Compute the project NPV assuming the project is abandoned after three years. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.5 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,050,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.9 million in pretax revenues with $5.6 million in total pretax operating costs. The tax rate is 38 percent and the discount rate is 13 percent. The market value of the equipment over the life of the project is as follows:
Explanation / Answer
Actual result may vary to given answer due to difference in discount factor digits used . Used 4 digit factor for accuracy Hand Clapper Inc a. NPV for 4 years operation Details Year 0 Year 1 Year 2 Year 3 Year 4 Equipment Investment (16,500,000) Invetment in Net WC (1,050,000) 1,050,000 Preatax revenue - 13,900,000 13,900,000 13,900,000 13,900,000 Pretax Cost 5,600,000 5,600,000 5,600,000 5,600,000 Deprectaion 4,125,000 4,125,000 4,125,000 4,125,000 Salvage 2,350,000 Preatx Income 4,175,000 4,175,000 4,175,000 6,525,000 Tax @38% 1,586,500 1,586,500 1,586,500 2,479,500 Net Income After Tax 2,588,500 2,588,500 2,588,500 4,045,500 Add back depreciation 4,125,000 4,125,000 4,125,000 4,125,000 Total Cash Flow in cluding WC return 6,713,500 6,713,500 6,713,500 9,220,500 Discount Factor @13% 1 0.8850 0.7831 0.6931 0.6133 PV of Cash Flows (17,550,000) 5,941,150 5,257,655 4,652,792 5,655,105 NPV = $ 3,956,703.29 b-2. Hand Clapper Inc NPV when project abandoned after 2 year Details Year 0 Year 1 Year 2 Year 3 Year 4 Equipment Investment (16,500,000) Invetment in Net WC (1,050,000) 1,050,000 Asset sale value 11,500,000 Book Value of asset when abandined 8,250,000 Capital Gain 3,250,000 Preatax revenue - 13,900,000 13,900,000 Pretax Cost 5,600,000 5,600,000 Deprectaion 4,125,000 4,125,000 Salvage 11,500,000 Capital gain 3,250,000 Preatx Income (considering capitalgain) 4,175,000 7,425,000 Tax @38% 1,586,500 2,821,500 Net Income After Tax 2,588,500 4,603,500 Add back depreciation 4,125,000 4,125,000 Total Cash Flow in cluding WC return & salvage 6,713,500 21,278,500 Discount Factor @13% 1 0.8850 0.7831 PV of Cash Flows (17,550,000) 5,941,150 16,664,187 NPV = $ 5,055,337 b-1. Hand Clapper Inc NPV when project abandoned after 1 year Details Year 0 Year 1 Year 2 Year 3 Year 4 Equipment Investment (16,500,000) Invetment in Net WC (1,050,000) 1,050,000 Asset sale value 14,500,000 Book Value of asset when abandined 12,375,000 Capital Gain 2,125,000 Preatax revenue - 13,900,000 Pretax Cost 5,600,000 Deprectaion 4,125,000 Salvage 14,500,000 Capital gain 2,125,000 Preatx Income (considering capitalgain) 6,300,000 Tax @38% 2,394,000 Net Income After Tax 3,906,000 Add back depreciation 4,125,000 Total Cash Flow in cluding WC return & salvage 23,581,000 Discount Factor @13% 1 0.8850 PV of Cash Flows (17,550,000) 20,868,142 NPV = $ 3,318,142 b-3. Hand Clapper Inc NPV when project abandoned after 3 years Details Year 0 Year 1 Year 2 Year 3 Year 4 Equipment Investment (16,500,000) Invetment in Net WC (1,050,000) 1,050,000 Asset sale value 9,000,000 Book Value of asset when abandined 4,125,000 Capital Gain 4,875,000 Preatax revenue - 13,900,000 13,900,000 13,900,000 Pretax Cost 5,600,000 5,600,000 5,600,000 Deprectaion 4,125,000 4,125,000 4,125,000 Salvage 9,000,000 Capital gain 4,875,000 Preatx Income (considering capitalgain) 4,175,000 4,175,000 9,050,000 Tax @38% 1,586,500 1,586,500 3,439,000 Net Income After Tax 2,588,500 2,588,500 5,611,000 Add back depreciation 4,125,000 4,125,000 4,125,000 Total Cash Flow in cluding WC return & salvage 6,713,500 6,713,500 19,786,000 Discount Factor @13% 1 0.8850 0.7831 0.6931 PV of Cash Flows (17,550,000) 5,941,150 5,257,655 13,712,691 NPV = $ 7,361,496