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A firm analyzing project that is expected to have annual sales of $850 and annual cost of goods sold of $580 To undertake the project the firm must invest 5720 in a fue asset at the beginning of the project
A firm analyzing project that is expected to have annual sales of $850 and annual cost of goods sold of $580 To undertake the project the firm must invest 5720 in a fue asset at the beginning of the project. The fixed asset will be depreciated straight in to zero over the four year life of the project. This asset wit have no salvage valve This asset will cause the firm to increase the investment in networking capital by 5130 when the projects undertaken the investment in net working capital will be reversed when the project ends. The tax retelt 30and the discount rate is 12% Find the net present value of the project 3125 $220 5148 520
Expert Solution
Answer : Option F = -29
Calculation :
NPV = Cash flow per year * Present Value Annuity Factor(12%, 4 years) + Recovery of Net Working Capital * Present Value factor(12%,4th year) - Initial Investment
Cash flow per year = Net Income after tax + Tax saving on depreciation
Net Income after tax = (850-580) * (1-tax rate)
= 270 * (1- 0.30)
= 270 * 0.70 ==> 189
Tax saving on depreciation = Depreciation * Tax rate
= (720/4) * 30%
= 180 * 30% ==> 54
Cash flow per year = 189 + 54 ==> 243
Initial Investment = Fixed cost investment + Net working capital
= 720 + 130 ==> 850
NPV = 243 * 3.0373493466264 + 130 * .636 - 850
= 738.07 + 82.68 - 850
= -29
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