# Finance

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Wheel Industries is considering a three year expansion project.

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 -

. 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
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 -

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%

• Finance -

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.

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