In analyzing a new potential business MacDonald Publishing’s financial staff is

Question

In analyzing a new potential business MacDonald Publishing’s financial staff is estimating an initial capital expenditure of $4.2 million. This equipment will be depreciated according to the MACRS 3 year class life and will have a market value of $1 million after four years. If MacDonald goes ahead with the new business, inventories and accounts payable will increase by $300,000 each. The new business is expected to have an economic life of four years and is expected to generate annual sales of 3.5 million and incur operating costs (excluding depreciation) of 2.2 million annually. If the company's tax rate is 40 percent and the required return is 10 percent, calculate the expected NPV of the new business.

Question 10 options:

$80,750.22

$71,060.20

$63,792.68

$68,637.69

$80,750.22

$71,060.20

$63,792.68

$68,637.69

Explanation / Answer

$80,750.22 Statemnet showing Cash flows Particulars Time PVf@10% Amount PV Cash Outflows                                  -                                               1.00    (4,200,000.00)    (4,200,000.00) PV of Cash outflows    (4,200,000.00) Cash inflows                           1.00                                        0.9091      1,339,944.00      1,218,130.91 Cash inflows                           2.00                                        0.8264      1,526,760.00      1,261,785.12 Cash inflows                           3.00                                        0.7513      1,028,808.00          772,958.68 Cash inflows                           4.00                                        0.6830          904,488.00          617,777.47 Cash inflows(After Tax Salvage Value)(1000,000*(1-.4)                           4.00                                        0.6830          600,000.00          409,808.07 PV of Cash Inflows      4,280,460.26 NPV            80,460.26 Year                           1.00                                             2.00                       3.00                       4.00 Sales          3,500,000.00                            3,500,000.00      3,500,000.00      3,500,000.00 Less Operating Costs          2,200,000.00                            2,200,000.00      2,200,000.00      2,200,000.00 Depreciation          1,399,860.00                            1,866,900.00          622,020.00          311,220.00 Net Increase in Earnings              (99,860.00)                             (566,900.00)          677,980.00          988,780.00 Tax @.40              (39,944.00)                             (226,760.00)          271,192.00          395,512.00 Inc in Earnings after tax              (59,916.00)                             (340,140.00)          406,788.00          593,268.00 Add Depr          1,399,860.00                            1,866,900.00          622,020.00          311,220.00 Inc CFAT          1,339,944.00                            1,526,760.00      1,028,808.00          904,488.00 Year                           1.00                                             2.00                       3.00                       4.00 Cost of Equipment          4,200,000.00                            4,200,000.00      4,200,000.00      4,200,000.00 Depreciation Rate 33.33% 44.45% 14.81% 7.41% Depreciation          1,399,860.00                            1,866,900.00          622,020.00          311,220.00 Diff in ans is due to rounding off Since CA and Cl increase by same amount increase in Working capital is nil thus ignored

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