Cash Flow Estimation Problems Problem 5: please do not solve using excel Your co

Question

Cash Flow Estimation Problems Problem 5: please do not solve using excel

Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation) will be 50 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3, respectively.

The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent cost of capital. Inflation is zero.

What is the project's NPV?

Explanation / Answer

1) Calculation of NPV of the given project :

Calculation of Operating cash flow :

Calculation of NPV :

Since NPV was negative do not accept this project.

Particulars Year1 Year2 Year3 Sales $900 $900 $900 Less:Variable costs ($450) ($450) ($450) Depreciation ($500) ($300) ($200) Profit before tax ($50) $150 $250 Less : Tax@40% - ($60) ($100) Profit after tax ($50) $90 $150 Add : Depreciation $500 $300 $200 Operating Cash Flow $450 $390 $350

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