Toolway Inc. is considering a project with an initial fixed asset cost of $2.46
ID: 2743152 • Letter: T
Question
Toolway Inc. is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?
Explanation / Answer
Toolway Inc. Initial Investment $ 2,460,000.00 Expected Life 10 Years Saving of operating cost $ 725,000.00 Per Year Tax Rate 35% Required Inventory $ 45,000.00 Initial Year Required Rate of Return 14% Depreciation 246000 Per Year Year Cash Inflow P.V Factor P.V Initial Investment 0 $ (2,460,000.00) 1 $ (2,460,000.00) Operating Cash Flow (1-10)Year $ 557,350.00 5.2161 $ 2,907,193.34 Required Inventory 0 $ (45,000.00) 1 $ (45,000.00) Inventory Recovered 10 Year $ 45,000.00 0.26974 $ 12,138.30 Salvage Value * 10 Year $ 195,000.00 0.26974 $ 52,599.30 NPV $ 466,930.94 Working: Operating Cash Flow Saving of operating cost $ 725,000.00 Depreciation $ 246,000.00 Profit before tax $ 479,000.00 Tax $ 167,650.00 Profit after Tax $ 311,350.00 Add: Depreciation $ 246,000.00 Operating Cash flow $ 557,350.00 Salvage Value would be considered after Tax of 35% $ 195,000.00 NPV is positive so project should be implemented.