Yeatman Co. is considering an investment that will have the following sales, var
ID: 2721838 • Letter: Y
Question
Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:
The project will require an investment of $25,000 in new equipment but no investment is needed in its net operating working capital. The equipment will have a salvage value of $2,000 at the end of the project's 4-year life. Yeatman pays a constant tax rate of 40%, and the MACRS Depreciation is used.
What is the project's NPV if the WACC is 11%? Make sure you include FCF0 in your calculation.
Year 1 Year 2 Year 3 Year 4 Unit Sales 5,500 5,200 5,700 5,820 Sale price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed Operating costs except depreciation $66,750 $68,950 $69,690 $68,900 Accelerated Depreciation Rate 33% 45% 15% 7%Explanation / Answer
Solution:
Year
I
II
III
IV
Sale price
$ 234,135.00
$ 226,460.00
$ 255,132.00
$ 272,317.80
Variable cost
$ 125,565.00
$ 119,444.00
$ 133,665.00
$ 138,923.40
Fixed Operating costs
$ 66,750.00
$ 68,950.00
$ 69,690.00
$ 68,900.00
Depreciation
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
EBIT
$ 33,570.00
$ 26,816.00
$ 48,027.00
$ 62,744.40
Tax
$ 13,428.00
$ 10,726.40
$ 19,210.80
$ 25,097.76
EAIT
$ 20,142.00
$ 16,089.60
$ 28,816.20
$ 37,646.64
$25,000 x 33%
$25,000 x 45%
$25,000 x 15%
$25,000 x 7%
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
Depreciation
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
EAIT
$ 20,142.00
$ 16,089.60
$ 28,816.20
$ 37,646.64
Operating Cash Inflows
$ 28,392.00
$ 27,339.60
$ 32,566.20
$ 39,396.64
Total Cash Inflows
$ 127,694.44
Total Cash Outflows
$ 25,000.00
$ 102,694.44
Years
Cash Inflows
i=11%
Cash inflows with discount
1
$ 20,142
0.90
$ 18,146
2
$ 16,090
0.81
$ 13,059
3
$ 28,816
0.73
$ 21,070
4
$ 37,647
0.66
$ 24,799
Total
$ 102,694
3.10
$ 77,074
Salvage Values
$ 2,000.00
Tax on Salvage Value
$ (800.00)
Additional end-of-project cash flow
$ 1,200.00
Year
I
II
III
IV
Sale price
$ 234,135.00
$ 226,460.00
$ 255,132.00
$ 272,317.80
Variable cost
$ 125,565.00
$ 119,444.00
$ 133,665.00
$ 138,923.40
Fixed Operating costs
$ 66,750.00
$ 68,950.00
$ 69,690.00
$ 68,900.00
Depreciation
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
EBIT
$ 33,570.00
$ 26,816.00
$ 48,027.00
$ 62,744.40
Tax
$ 13,428.00
$ 10,726.40
$ 19,210.80
$ 25,097.76
EAIT
$ 20,142.00
$ 16,089.60
$ 28,816.20
$ 37,646.64
$25,000 x 33%
$25,000 x 45%
$25,000 x 15%
$25,000 x 7%
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
Depreciation
$ 8,250.00
$ 11,250.00
$ 3,750.00
$ 1,750.00
EAIT
$ 20,142.00
$ 16,089.60
$ 28,816.20
$ 37,646.64
Operating Cash Inflows
$ 28,392.00
$ 27,339.60
$ 32,566.20
$ 39,396.64
Total Cash Inflows
$ 127,694.44
Total Cash Outflows
$ 25,000.00
$ 102,694.44
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