Consider the following project of Hand Clapper, Inc. The company is considering
ID: 2748902 • 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 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,000,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $12.9 million in pretax revenues with $5.1 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:
Year 1 14 mill Year 2 11 mill Year 3 8.5mill Year 4 1.85 mill
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 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,000,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $12.9 million in pretax revenues with $5.1 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:
Year 1 14 mill Year 2 11 mill Year 3 8.5mill Year 4 1.85 mill
a.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.)
b-1Compute 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.)
Explanation / Answer
Part - A
part - B
1. When project is abandoned after 3 years, NPV is calculated as below:
c. When project is abondoned after 2 years
d. When project is abandoned after 1 year
Year 0 1 2 3 4 Initial Investment -16000000 Working Capital Investment -1000000 Pre tax revenue 12900000 12900000 12900000 12900000 Operating Costs 5100000 5100000 5100000 5100000 Less: Depriciation 4000000 4000000 4000000 4000000 Profit Before tax 3800000 3800000 3800000 3800000 Tax at 38% 1444000 1444000 1444000 1444000 Net profit 2356000 2356000 2356000 2356000 Return of working Capital 1000000 Sale of Machine at year 4 1850000 No tax since Book value of the machine is 4 Million Total Profits 2356000 2356000 2356000 5206000 Add back deprication 4000000 4000000 4000000 4000000 Total operating Cash flow -17000000 6356000 6356000 6356000 9206000 Discount factor at 13% 0.884956 0.783147 0.69305 0.613319 Discounted Cash Flows -17000000 5624779 4977680 4405027 5646212