XYZ, Inc. is considering a new project requiring a $180,000 initial investment i

Question

XYZ, Inc. is considering a new project requiring a $180,000 initial investment in equipment having a useful life of 3 years with zero expected salvage value. The investment will produce $130,000 in annual revenues and $90,000 in annual costs. Assume a tax rate of 30% and straight-line depreciation. What is the operating cash flow per year?

A new piece of specialty equipment costs $2,500,000 and will be depreciated to an expected salvage value of $400,000 on a straight-line basis over its 3-year life. Assuming a tax rate of 35%, what is its after-tax salvage value if the equipment is actually sold after 2 years for $1,250,000?

A project requires additional accounts receivable of $1,000,000 and additional inventory of $500,000. It results in additional accounts payable of $800,000. Net working capital will return to its normal level following the 3-year project. What is the effect on the NPV of the project solely due to this investment in net working capital, assuming a 10% required rate of return?

Explanation / Answer

1)

Sales $    130,000 Less: Costs $      90,000 Depreciation $      60,000 180000/3 EBIT $    (20,000) Less: Tax @ 30% $      (6,000) Net income $    (14,000) Add: Depreciation $      60,000 Operating cash flows $      46,000

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