Suppose you are facing the follwoing capital budgeting proposal: $100,000 inital

Question

Suppose you are facing the follwoing capital budgeting proposal: $100,000 inital cost, to be depreciated straight-line over 5 years to an expected salvage value of $ 5000, 35% tax rate, $45,000 additional revenues for the first year,and it is growing at a rate of 5% till the project ends. The expenses include both variable and fixed costs. The variable cost is 40% of the revenue, while the fixed cost is $8000 annually. Working capital is 20% of the following year's revenue. Assuming the cost of capital is 11%, complete the following worksheet first, then determine whether or not the project should be approved based on NPV method. How much your NPV is going to increase/decrease if variable cost goes up to 50%?

Explanation / Answer

Answer:

$11826.35 NPV is going to dec if vc goes upto 50%.

Particulars Year 0 1 2 3 4 5 Cost -100000 Working capital 0 9000 9450 9922.5 10418.63 10939.56 Change in working capital 9000 450 472.5 496.125 520.9313 Revenue 45000 47250 49612.5 52093.13 54697.78 Expenses 26000 26900 27845 28837.25 29879.11 Depreciation 19000 19000 19000 19000 19000 Pretax profit -9000 900 2295 3759.75 5297.738 Taxes -3150 315 803.25 1315.913 1854.208 Profit -5850 585 1491.75 2443.838 3443.529 Salvage value 1750 Cash flows -100000 13150 19585 20491.75 21443.84 24193.53 P.V.F (11%) 1 0.901 0.812 0.731 0.659 0.593 Discounted cash flows -100000 11848.15 15903.02 14979.47 14131.49 14346.76 NPV -28791.10892

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