Question
First part: Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000, 35% tax rate, $45,000 additional revenues, $15,000 additional expense, $8,000 additional investment in working capital, 11% cost of capital.
Second part: Recalculate the NPV for the proposal, now assuming that the $45,000 in annual revenues will grow at a 6% annual rate and that the $15,000 in annual expenses will grown at a %5 annual rate.
Thanks in advance for your help!
Explanation / Answer
First Part
Year 0 1 2 3 4 5 Additional Revenues 45,000.00 45,000.00 45,000.00 45,000.00 45,000.00 Less: Additional Expenses (15,000.00) (15,000.00) (15,000.00) (15,000.00) (15,000.00) Less: Depreciation (19,000.00) (19,000.00) (19,000.00) (19,000.00) (19,000.00) EBT 11,000.00 11,000.00 11,000.00 11,000.00 11,000.00 Less: Tax @ 35% (3,850.00) (3,850.00) (3,850.00) (3,850.00) (3,850.00) EAT 7,150.00 7,150.00 7,150.00 7,150.00 7,150.00 Add: Depreciation 19,000.00 19,000.00 19,000.00 19,000.00 19,000.00 Operating Cash Flow 26,150.00 26,150.00 26,150.00 26,150.00 26,150.00 Investment (100,000.00) After tax Salvage Value 3,250.00 Working Capital (8,000.00) 8,000.00 Free Cash Flow (108,000.00) 26,150.00 26,150.00 26,150.00 26,150.00 37,400.00 P.V. Factor of 11% 1.0000 0.9009 0.8116 0.7312 0.6587 0.5935 P.V. of Free Cash Flow (108,000.00) 23,558.56 21,223.93 19,120.65 17,225.81 22,195.08
NPV (4,675.97) The Project will be rejected because of negative NPV Second Part Year 0 1 2 3 4 5 Additional Revenues 45,000.00 47,700.00 50,562.00 53,595.72 56,811.46 Less: Additional Expenses (15,000.00) (15,750.00) (16,537.50) (17,364.38) (18,232.59) Less: Depreciation (19,000.00) (19,000.00) (19,000.00) (19,000.00) (19,000.00) EBT 11,000.00 12,950.00 15,024.50 17,231.35 19,578.87 Less: Tax @ 35% (3,850.00) (4,532.50) (5,258.58) (6,030.97) (6,852.60) EAT 7,150.00 8,417.50 9,765.93 11,200.37 12,726.27 Add: Depreciation 19,000.00 19,000.00 19,000.00 19,000.00 19,000.00 Operating Cash Flow 26,150.00 27,417.50 28,765.93 30,200.37 31,726.27 Investment (100,000.00) After tax Salvage Value 3,250.00 Working Capital (8,000.00) 8,000.00 Free Cash Flow (108,000.00) 26,150.00 27,417.50 28,765.93 30,200.37 42,976.27 P.V. Factor of 11% 1.0000 0.9009 0.8116 0.7312 0.6587 0.5935 P.V. of Free Cash Flow (108,000.00) 23,558.56 22,252.66 21,033.40 19,893.92 25,504.32
NPV 4,242.86 The Project will be accepted because of positive NPV
