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SIRAJ is considering an investment project
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
Expert Solution
A)CALCULATION OF PV OF INTIAL INVESTMENTAMOUNT REQUIRED TO PURCHASE PLANT & MACHINERY=6000000WORKING CAPITAL REQUIREMENT= 100000TOTAL INTIAL INVESTMENT 6,100,000CALCULATION OF DEPRICIATIONDEPRICIATION= COST OF MACHINERY/NO.OF YEARS1500000DEPRICIATION PER YEAR=15,00,000B)CALCULATION OF OCFPARTICULARSYEAR-1YEAR-2YEAR-3YEAR-4SALES 2,500,0002,500,000 2,500,000 2,500,000LESS:OPERATING EXP@30% 750,000 750,000 750,000 750,000LESS:DEPRICIATION 1,500,0001,500,000 1,500,000 1,500,000PBT 250,000 250,000 250,000 250,000LESS:TAX@30% 75,000 75,000 75,000 75,000PAT 175,000 175,000 175,000 175,000ADD:DEPRICIATION 1,500,0001,500,000 1,500,000 1,500,000OCF 1,675,0001,675,000 1,675,000 1,675,000C)TERMINAL VALUESALE VALUE OF ASSET AT THE END OF 4TH YEAR 500,000LESS: TAX@30%150000 350,000NOTE: HERE BOOK VALUE IS ZERO.D) CALCULATION OF NPVNPV= PV OF CASH INFLOWS - PV OF CASH OUTFLOWCALCULATION OF PV OF CASH INFLOWS :PERIODCASH FLOWPVF@13%PV OF CF116750000.8851482375216750000.78311311692.5316750000.69311160942.5416750000.61331027277.544500000.6133275985TOTAL5258272.5NPV=52,58,272.5-61,00,000NPV=(841,728)THEREFORE NPV IS NEGATIVE PROJECT IS NOT ACCEPTABLE.NOTE: AT THE END OF FOURTH YEAR WE GET ADDITIONAL CASH INFLOW THROUGH WORKING CAPITAL RETURN & SALE VALUE.
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