Harvest Fields is considering expanding its wine-making operations.The expansion

Question

Harvest Fields is considering expanding its wine-making operations.The expansion will require new equipment costing $489,000 thatwould be depreciated on a straight-line basis to a zero balanceover the 5-year life of the project. The estimated salvage value is$172,000. The project requires $41,000 initially for net workingcapital, all of which will be recouped at the end of the project.The projected operating cash flow is $201,500 a year. What is thenet present value of this project if the relevant discount rate is16 percent and the tax rate is 34 percent?

Explanation / Answer

Cash out flows Cash inflows Terminal cash inflows Investment 489000 salvage value 113520 working capital 41000 41000 Operating cash flows 201500        Total 530000 201500 154520 Solvage value = 172000*(1-0.34)                     = 113520 Discount rate = 16% NPV:- 1 2 3 4=2*3 Year Cash flows PVF (at 16%) Present value 0 -530000 1 -530000 1 to 5 201500 3.2743 659771.45 5 154520 0.4761 73566.972              Total 203338.422 Netpresent value of this project at 16% = $20338.42 Cash out flows Cash inflows Terminal cash inflows Investment 489000 salvage value 113520 working capital 41000 41000 Operating cash flows 201500        Total 530000 201500 154520 Solvage value = 172000*(1-0.34)                     = 113520 Discount rate = 16% NPV:- 1 2 3 4=2*3 Year Cash flows PVF (at 16%) Present value 0 -530000 1 -530000 1 to 5 201500 3.2743 659771.45 5 154520 0.4761 73566.972              Total 203338.422 Netpresent value of this project at 16% = $20338.42

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