A company is considering a 3-year project that requires an initial installed equ

Question

A company is considering a 3-year project that requires an initial installed equipment cost of $8,000. The project engineer has estimated that the operating cash flows will be $3,000 in year 1, $7,000 in year 2, and $7,000 in year 3. The new machine will also require a parts inventory of $2,000 at the beginning of the project (assume this inventory can be sold for cost at the end of the project). It is also estimated that the equipment can be sold as salvage for an after tax salvage cash flow of $6,000 at the end of the project. If the tax rate is 34% and the required rate of return is 17%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Explanation / Answer

Calculation of net present value of project Year 0 1 2 3 NPV Equipment Cost -$8,000 Investment in inventory -$2,000 Sale of Inventory $2,000 Operating Cash flow $3,000 $7,000 $7,000 Tax @ 34% on operating cash flow -$1,020 -$2,380 -$2,380 After tax Salvage Cash flow $6,000 Net Cash flow -$10,000 $1,980 $4,620 $12,620 Discount Factor @ 17% 1 0.8547009 0.7305136 0.6243706 Present Values -$10,000.00 $1,692.31 $3,374.97 $7,879.56 $2,947 NPV of the project $2,947

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