Foley Systems is considering a new investment whose data are shown below. The eq
ID: 2787632 • Letter: F
Question
Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Net investment in fixed assets (basis) $75,000 Required net operating working capital $15,000 Straight-line depreciation rate 33.333% Annual sales revenues $66,000 Annual operating costs (excl. depr.) $25,000 Tax rate 35.0%
Explanation / Answer
NPV Calcualtion Year Particulars Cashflow Discounting factor @10% Discounted cashflow 0 Inintial Cost $ (75,000) 1.00 (75,000) 0 Working capital $ (15,000) 1.00 (15,000) 1 Cashflow $ 35,400 0.91 32,182 2 Cashflow $ 35,400 0.83 29,256 3 Cashflow $ 35,400 0.75 26,597 3 Working capital $ 15,000 0.75 11,270 NPV' 9,304.28 Cashflow calcualtion Year 1 Year 2 Year 3 a Revenue $ 66,000 $ 66,000 $ 66,000 b Cost $ 25,000 $ 25,000 $ 25,000 c Depreciation $ 25,000 $ 25,000 $ 25,000 c Profit after depreciation (a-b-c) $ 16,000 $ 16,000 $ 16,000 d TAX @ 35% $ 5,600 $ 5,600 $ 5,600 e Profit after tax (c-d) $ 10,400 $ 10,400 $ 10,400 f Cashflow (e+c) $ 35,400 $ 35,400 $ 35,400 Depreciation Schedule Opening Balance Depreciation rate Depreciation Closing Balance 1 75,000 33.33% 25,000 50,000 2 50,000 33.33% 25,000 25,000 3 25,000 33.33% 25,000 0