Wednesday

September 2, 2015
Posted by **Shelly** on Thursday, April 22, 2010 at 8:08am.

The project requires an initial investment of $1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million and has costs of $600,000.

The tax rate is 35%. Calculate the cash flows for the project. If the discount rate is 6% calculate the NPV of the project.

- Finance -
**Gin**, Sunday, October 2, 2011 at 10:42am. Depreciation = Cost of the asset – salvage value

Life of the asset

= 1,500,000/ 3

= 500,000

Calculation of cash flows:

Revenue – 1,200,000

Less Cost – 600,000

Less Depreciation – 500,000

Profit - 100,000

Less taxes (35%) 35,000

Profit after taxes 65,000

Add depreciation 500,000

Cash flow after taxes 565,000

NPV = Present value of cash flows - Cash outlay

= 565,000 x PVIFA 6%, 3 years – 1,200,000

= 565,000 x 2.6730 – 1,200,000

= 1,510,245 – 1,200,000

= 310,245

This project should be accepted because the NPV is positive.

- Finance -
**GIN**, Wednesday, October 5, 2011 at 12:28pmSORRY I MISCALCULATED SOMETHING!!! HERE IS THE CORRECT SOLUTION!

a. Cash flows (Millions of Dollars)

Year 0 Year 1 Year 2 Year 3

Initial Investment –1.5

Sales 1.2 1.2 1.2

Costs 0.6 0.6 0.6

–Depreciation 0.5 0.5 0.5

EBT 0.1 0.1 0.1

Taxes 0.035 0.035 0.035

NI 0.065 0.065 0.065

+ Depreciation 0.5 0.5 0.5

OCF 0.565 0.565 0.565

Total cash flows –1.5 0.565 0.565 0.565

NPV at 6% = –1,500,000 + 565,000/(1.06) + 565,000/(1.06)2 + 565,000/(1.06)3

= –1,500,000 + 533,018.869 + 502,847.988 + 474,384.894

= $10,251.751

NPV = +$10,251 Acceptable project

The PV could have been calculated by using the table in the back of the text.

b. r = D1/ P0 + g = [2.50(1.06)/50] + 0.06 = 11.3%

- Finance -
**GIN**, Wednesday, October 5, 2011 at 12:33pmfOR THE npv CALCULATION,

-1,5000,000 + 565,000/(1.06)+ 565,000/(1.06)^2 + (1.06)^3

tHEY ARE SUPPOSED TO BE EXPONENTS. aLSO KEEP IN MIND THAT THE SET OF 3 NUMBERS YOU SEE IN PART a UNDER CASH FLOWS, REPRESENT THE AMOUNT IN YEAR 1, YEAR 2, AND YEAR 3, WHERE THERE IS A FOURTH NUMBER IN THE ROW THAT IS FOR YEAR 0. i'M SORRY FOR THE PRIOR CONFUSION AND THAT THIS PASTED WEIRD---I HOPE THIS HELPS.