Consider the following project of Hand Clapper, Inc. The company is considering
ID: 2748680 • 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 $16.3 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,030,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.5 million in pretax revenues with $5.4 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:
(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a.Assuming the company operates this project for four years, what is the NPV?
b.Compute the project NPV assuming the project is abandoned after one year.
c.Compute the project NPV assuming the project is abandoned after two years.
d.Compute the project NPV assuming the project is abandoned after three years.
Year Market Value (millions) 1 $ 14.30 2 11.30 3 8.80 4 2.15Explanation / Answer
NPV at the End of 4 Years Year Pretax Revenues Pretax Expenses Income before Tax Tax Net Income Depreciation Saving in Tax Total Inflows Discounted Values@13% Net Inflow Initial Outflow+WC -17330000 1 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.884956 5814601.77 2 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.783147 5145665.283 3 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.69305 4553686.091 4 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.613319 4029810.7 Total 2213763.844 Add: Discounted Salvage Value(2150000*0.613319) 1318635.85 Add: Release of WC(1030000*0.613319) 631718.57 Total NPV 4164118.264 NPV at the End of 1 Year Year Pretax Revenues Pretax Expenses Income before Tax Tax Net Income Depreciation Saving in Tax Total Inflows Discounted Values@13% Net Inflow Initial Outflow+WC -17330000 1 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.884956 5814601.77 Total -11515398.2 Add: Discounted Salvage Value(14300000*0.884956) 12654870.8 Add: Release of WC(1030000*0.884956) 911504.68 Total NPV 2050977.25 NPV at the End of 2 Year Year Pretax Revenues Pretax Expenses Income before Tax Tax Net Income Depreciation Saving in Tax Total Inflows Discounted Values@13% Net Inflow Initial Outflow+WC -17330000 1 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.884956 5814601.77 2 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.783147 5145665.283 Total -6369732.95 Add: Discounted Salvage Value(11300000*0.783147) 8849561.1 Add: Release of WC(1030000*0.783147) 806641.41 Total NPV 3286469.563 NPV at the End of 3 Year Year Pretax Revenues Pretax Expenses Income before Tax Tax Net Income Depreciation Saving in Tax Total Inflows Discounted Values@13% Net Inflow Initial Outflow+WC -17330000 1 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.884956 5814601.77 2 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.783147 5145665.283 3 13500000 5400000 8100000 3078000 5022000 4075000 1548500 6570500 0.69305 4553686.091 Total -1816046.86 Add: Discounted Salvage Value(8800000*0.69305) 6098840 Add: Release of WC(1030000*0.69305) 713841.5 Total NPV 4996634.644