Posted by Shelly on Thursday, April 22, 2010 at 8:08am.
. 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.
SORRY 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%
fOR 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.