the equopiment to be used would be depreciated by the straight line method over its 3 yr life and would have a zero salvage value and no woking capital required . Revenues and othe operating cost are expected to be constant over the projects 3yr life However the products would reduce the re annual cash flow.what is the projects NPV. Constant (1-3yrs)WACC 10%,PRE-TAX cash low reduction for othepr oducts(cannibalization)-5000,Investment (depreciable basis) 80,000,straight line 33.333%,sales revenus 63,500,anual operating cost -25,000, tax rate 35.0%
To calculate the Net Present Value (NPV) of the project, you need to follow these steps:
Step 1: Calculate the annual cash flow for each year:
Year 1:
Revenue: $63,500
Operating Cost: -$25,000
Cash Flow: Revenue - Operating Cost = $63,500 - $25,000 = $38,500
Year 2:
Revenue: $63,500
Operating Cost: -$25,000
Cash Flow: Revenue - Operating Cost = $63,500 - $25,000 = $38,500
Year 3:
Revenue: $63,500
Operating Cost: -$25,000
Cash Flow: Revenue - Operating Cost - Cash Flow Reduction = $63,500 - $25,000 - $5,000 = $33,500
Step 2: Calculate the depreciation expense for each year:
Depreciation Expense = Depreciable Basis * Straight Line Percentage
Year 1:
Depreciation Expense = $80,000 * 33.333% = $26,666.40
Year 2:
Depreciation Expense = $80,000 * 33.333% = $26,666.40
Year 3:
Depreciation Expense = $80,000 * 33.333% = $26,666.40
Step 3: Calculate the taxable income for each year:
Taxable Income = Cash Flow - Depreciation Expense
Year 1:
Taxable Income = $38,500 - $26,666.40 = $11,833.60
Year 2:
Taxable Income = $38,500 - $26,666.40 = $11,833.60
Year 3:
Taxable Income = $33,500 - $26,666.40 = $6,833.60
Step 4: Calculate the tax expense for each year:
Tax Expense = Taxable Income * Tax Rate
Year 1:
Tax Expense = $11,833.60 * 35.0% = $4,131.76
Year 2:
Tax Expense = $11,833.60 * 35.0% = $4,131.76
Year 3:
Tax Expense = $6,833.60 * 35.0% = $2,388.76
Step 5: Calculate the after-tax cash flow for each year:
After-Tax Cash Flow = Cash Flow - Tax Expense + Depreciation Expense
Year 1:
After-Tax Cash Flow = $38,500 - $4,131.76 + $26,666.40 = $61,034.64
Year 2:
After-Tax Cash Flow = $38,500 - $4,131.76 + $26,666.40 = $61,034.64
Year 3:
After-Tax Cash Flow = $33,500 - $2,388.76 + $26,666.40 = $57,777.64
Step 6: Calculate the Present Value (PV) of each cash flow:
PV = Cash Flow / (1+WACC)^Year
WACC = Weighted Average Cost of Capital = 10%
Year 1:
PV = $61,034.64 / (1+10%)^1 = $55,486.94
Year 2:
PV = $61,034.64 / (1+10%)^2 = $50,438.58
Year 3:
PV = $57,777.64 / (1+10%)^3 = $44,097.85
Step 7: Calculate the NPV by summing up the present values of all cash flows:
NPV = Sum of PV - Initial Investment
NPV = $55,486.94 + $50,438.58 + $44,097.85 - $80,000 = $69.37
Therefore, the project has a Net Present Value (NPV) of $69.37.