Question 1 (20 points: Consider an investment project that has the life time of

Question

Question 1 (20 points: Consider an investment project that has the life time of 10 years and requires the investment of S600,000 at time zero for machinery and equipment to be depreciated over 6 years with half year straight line depreciation method (starting in year 1 to year 7). Annual revenue is estimated to be S200,000 and annual operating costs of S50,000. S150,000 for working capital investment is also needed at time zero and working capital return is expected to equal the initial working capital investment at the end of the project (10th year). Salvage value of the machinery and equipment is expected to be zero. The minimum After Tax Cash Flow ROR is 10% and the effective income tax rate is 35%. Calculate After Tax Cash Flow, NPV, and ROR of the project.

Explanation / Answer

Depreciation Schedule Opening Balance Depreciation rate Depreciation Closing Balance 1                    600,000 8.33%              50,000                 550,000 2                    550,000 16.67%            100,000                 450,000 3                    450,000 16.67%            100,000                 350,000 4                    350,000 16.67%            100,000                 250,000 5                    250,000 16.67%            100,000                 150,000 6                    150,000 16.67%            100,000                    50,000 7                      50,000 8.33%              50,000                             -   Cashflow after Tax calcualtion Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 a Revenue $     200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 b Operating Cost $        50,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 c PBITDA (a-b) $     150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 d Depreciation $        50,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $    50,000 $             -   $             -   $             -   e Profit after depreciation (c-d) $     100,000 $    50,000 $    50,000 $    50,000 $    50,000 $    50,000 $ 100,000 $ 150,000 $ 150,000 $ 150,000 f TAX @ 35% $        35,000 $    17,500 $    17,500 $    17,500 $    17,500 $    17,500 $    35,000 $    52,500 $    52,500 $    52,500 g Profit after tax (e-f) $        65,000 $    32,500 $    32,500 $    32,500 $    32,500 $    32,500 $    65,000 $    97,500 $    97,500 $    97,500 h After Tax Cashflow (c+g) $     115,000 $ 132,500 $ 132,500 $ 132,500 $ 132,500 $ 132,500 $ 115,000 $    97,500 $    97,500 $    97,500 NPV Calcualtion Year Particulars Cashflow Discounting factor @10% Discounted cashflow 0 Inintial Cost $ (600,000) 1.00      (600,000) 0 Working capital $ (150,000) 1.00      (150,000) 1 After Tax Cashflow $   115,000 0.91        104,545 2 After Tax Cashflow $   132,500 0.83        109,504 3 After Tax Cashflow $   132,500 0.75           99,549 4 After Tax Cashflow $   132,500 0.68           90,499 5 After Tax Cashflow $   132,500 0.62           82,272 6 After Tax Cashflow $   132,500 0.56           74,793 7 After Tax Cashflow $   115,000 0.51           59,013 8 After Tax Cashflow $      97,500 0.47           45,484 9 After Tax Cashflow $      97,500 0.42           41,350 10 After Tax Cashflow $      97,500 0.39           37,590 10 Working capital $   150,000 0.39           57,831 Total     52,432.09 ROR 11.54%

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