A firm is undertaking a project with the following details provided. The project
ID: 2778228 • Letter: A
Question
A firm is undertaking a project with the following details provided. The project costs $2.5 million and has a five-year service life.
-The project is classified under a seven year property under the MACRS rule.
-At the end of the fifth year, any assets held for the project will be sold. The expected salvage value will be 10% of the initial project cost.
-The firm will finance 40% of the project money from an outside source with an interest rate of 10%. The firm is required to repay the loan with five equal annual payments.
-The firms incremental marginal tax rate is 35%
-MARR is 15%
-Given the information,
Determine the end of year cash flows for years 0 through 5?
Compute the Net Present Worth for this 5-year project?
Please show work, thanks.
Explanation / Answer
Question- Statement Showing Cash Flows.
Year
0
1
2
3
4
5
Initial Investment
2500,000
-
-
-
-
-
Depreciation
357250
612250
437250
312250
223250
Interest
100,000
83620.25
65602.53
45783.03
23981.59
Tax Saving on Interest and Depreciation
160037.50
243554.59
175998.39
125311.56
86531.06
Net Saving (a)
0
60037.50
159934.34
110395.86
79528.53
62549.47
Salvage Value (b)
250,000
Tax Saving on loss of salvage value (c )
107,713
Total Cash Inflow (a+b+c)
60,037.50
159934.34
110395.86
79528.53
420262.47
DF @ MARR
1.00
0.87
0.76
0.66
0.57
0.50
Discounted Cash Flow
-250,000
52206.52
120933.34
72587.07
45470.70
208944.72
WN (‘1) – Loan Amortisation
Instalment Amount = ‘i x (1+ ‘i)n / (1+’i)n -1
Instalment Amount =$ 263797.48
Year
Instalment
Interest
Principal
Balance
0
1000,000
1
263797.48
100000
163797.48
836202.52
2
263797.48
83620.25
180177.23
656025.59
3
263797.48
65602.536
198194.95
457830.34
4
263797.48
45783.03
218014.45
239815.89
5
263797.48
23981.59
239815.89
0.00
WN(‘2) Depreciation Calculation
Particular
1
2
3
4
5
Depreciation Rate (%)
14.29
24.49
17.49
12.49
8.93
Depreciation
357250
612250
437250
312250
223250
WN -3
Salvage Value
Cost
2500000
Accumulated Depreciation
1942250
WDV
557750
Sale value
250,000
Loss
307,750
Tax Saving on loss (Loss x Tax rate)
107,712.50
Notes/ Assumption- (‘1) As information about income from investment is not given hence, NPV cannot be calculated.
(‘2) Tax saving on expense and loss is considered as net inflow.
Year
0
1
2
3
4
5
Initial Investment
2500,000
-
-
-
-
-
Depreciation
357250
612250
437250
312250
223250
Interest
100,000
83620.25
65602.53
45783.03
23981.59
Tax Saving on Interest and Depreciation
160037.50
243554.59
175998.39
125311.56
86531.06
Net Saving (a)
0
60037.50
159934.34
110395.86
79528.53
62549.47
Salvage Value (b)
250,000
Tax Saving on loss of salvage value (c )
107,713
Total Cash Inflow (a+b+c)
60,037.50
159934.34
110395.86
79528.53
420262.47
DF @ MARR
1.00
0.87
0.76
0.66
0.57
0.50
Discounted Cash Flow
-250,000
52206.52
120933.34
72587.07
45470.70
208944.72
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