Mrs. Milva, the CFO of the Red Scarf Corportation, is considering a capital budg

Question

Mrs. Milva, the CFO of the Red Scarf Corportation, is considering a capital budgeting project to buy a new machine. The price of the machine is $99,000. The project requires $25,000 net opertating working capital. The amount of net working capital would be recovered at end of the project's life. The machine would be depreciated on a straight-line basis (at 33.33% per year) over the project's 3-year life with a zerp salvage value. Annual sales revenues are $100,000 an annual operating costs (excluding depreciation) are $35,000. Revenues and operating costs are expected to be constant over the project's life. The RSC's WACC is 11% and its tax rate is 40%. What is the project's NPV?

Explanation / Answer

Intitial Cash Outflow = 99,000 + 25,000 = $124,000

Annual Cash Inflow = [(100,000 - 35,000 - 33,000) x (1 -0.4)] + 33,000 = $52,200

Terminal Cash Inflow = $25,000(release of working capital)

NPV = -99,000 + 52,200 x PVAF(11%, 3years) + 25,000 x PVF(11%, 3years)
        = -99,000 + 52,200 x 2.444 + 25,000 x 0.731 = $46,836.91

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.