Cody Jackson plans to import olives to sell to restaurants and specialty stores.
ID: 2821898 • Letter: C
Question
Cody Jackson plans to import olives to sell to restaurants and specialty stores. This venture will require an initial outlay of $295,000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to a salvage value of $110,000 in 15 years. In addition, she will need $60,000 in working capital during the 15 years of the project. Annual sales are estimated to be $202,000 and annual expenses $135,000. She also estimates that the marginal tax rate and RRR will be 25% and 8%, respectively, during the lifetime of project. Using the given information, answer the following questions
a. What is the depreciation amount each year?
b. What is the net cash flow associated with the venture at year 1?
c. What is the amount of tax payment at year 8?
d. What is the net present value (NPV) of the proposed project?
e. What is the IRR of the project?
f. Should the company accept the project? Justify your answer by using the IRR of the project.
g. Calculate the net present values of the project (NPV) at the different RRR. The RRR starts from 0% and increases by 2% until 20%. Paste to the “answer” sheet only the NPV at 10%.
h. Using the answers in the question g, draw a chart that shows the NPV of the project at different levels of cost of capital. Don’t forget to give appropriate title and labels of X and Y on the chart.
Explanation / Answer
A.
Depreciation amount each year = (Initial cost of the project - salvage value) / No. of year
= ($2,95,000 - $1,10,000 ) / 15
= $12,333.33
B.
Net cah flow associated with year 1 = Annual Sales - Cost - Depreciation
Annual Cash flow Before Tax = $2,02,000 - $1,35,000 - $12,333.33 = $54,667.67
Annual Cash flow after tax = $54,667.67 - $54,667.67 * 25% = $41,000.
Net cah flow associated with year 1 = $41,000.
C.
The Amount of Tax Payment in the year 8 =
First we need to calculate Annual Cash flow before tax
Annual Cash flow Before Tax = $2,02,000 - $1,35,000 - $12,333.33 = $54,667.6
Tax Payment in the year 8 = $54,667.67 * 25% = $13,666.92.
Thanks