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%£ I... SIRAJ is considering an investment project. The project requires an initial $6 million outlay for equipment and machinery. Sales are projected to be 5000 UNIT per year the PRICE OF 500 DOLLAR for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. The cost of goods sold and operating expenses (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $500,000 at the end of year 4.SIRAJ also needs to add net working capital of $100,000 immediately. The networking capital will be recovered in full at the end of the fourth year. Assume the tax rate is 30% and the cost of capital is 13% I NEED TO SEE DETAILED SOLUTION IF YOU ATTACHE IT YOU SHOULD WRITE YOU NAME AND NUMBER ON THE SCREEN SHOT A-what is the initial investment B-what is the OCF C-what is the terminal value D-What is the NPV of this investment? I NEED TO SEE EACH STEP SOLUTION WRITING THE ANSWER ONLY IS CONSIDERED WRONG
(a) Calculation of initial investment at year 0
| Cost of Equipments & Machinary | $6,000,000 |
| Add: Working capital needed at year 0 | $100,000 |
| Initial invesents | $6,100,000 |
(b)..Calculation of operating cash flows from year 1 to year 4 .would be as follows.
| Particulars | Amounts $ |
| Sales Revenue (5,000 units*500) | 2,500,000 |
| Less: COGS & Operating expenses 30% | 7,500,000 |
| Less : Depreciation Exps.(6,000,000 )/4 | 1,500,000 |
| Income before tax | 250,000 |
| Less: income tax 30% | 75,000 |
| Income after tax | 175,000 |
| Add: Depreciation expenses | 1,500,000 |
| Operating Cash flows | 1,675,000 |
(c) .. Calculation of terminal cash flow at the end of year 4, would be as follows.
Teminal cash flow = ( + Working capital Recovered + after tax Salvage value)
TCF = $100,000 - $500,000(1-0.30)
TCF = $450,000
(d)..Calculation of NPV of project
| Years | Cash flows ($) | PVIF 13% | NPV ($) |
| 0 | (6,100,000) | 1.0000 | (6,100,000) |
| 1 | 1,675,000 | 0.8850 | 1,482,301 |
| 2 | 1,675,000 | 0.7831 | 1,311,771 |
| 3 | 1,675,000 | 0.6931 | 1,160,859 |
| 4 | 1,675,000 + 450,000 | 0.6133 | 1,303,302 |
| Sum up (NPV) | (841,767) |
NPV is negative
Note : In the present question it is mention that, the machine is fully depreciated in 4 years it means the book value of machine at the end of year 4 would be = 0 , and its market value would be $500,000 . so, all the market value of $500,000 is considered as Capital gain on sale of machine , hence tax is deducted @30% , so the net gain on sales is $350,000
