$200,000 cost + $10,000 shipping + $30,000 installation. Economic life = 4 years
ID: 2800953 • Letter: #
Question
$200,000 cost + $10,000 shipping + $30,000 installation. Economic life = 4 years Estimated salvage value = $25,000 MACRS 3-year class Depreciation for years 1, 2, 3, 4 is 33.33%, 44.45%, 14.81% and 7.41% respectively Annual unit sales 1,250. Unit sales price = $200 Unit costs = $100 Net working capital: Tax rate 40% Project cost of capital = 10% Calculate Depreciable basis Annual depreciation Annual sales revenue Annual cost of goods sold (using unit costs only) Annual operating cash flow Net working capital at beginning of each year Annual investment in NWC, starting with Year0 Salvage cash flow in Year 4 Annual net cash flow NPV and IRRExplanation / Answer
Working capital needed 12% 0f next years sale Salvage value of the equipment in five years 25,000 Annual revenues and costs: Sales revenues (1250 x 200) 2,50,000 Cost of goods sold (1250 x 100) 1,25,000 Tax rate 40.00% Discount rate 10% MACRS (3 years) Year 1 33.33% Year 2 44.45% Year 3 14.81% Year 4 7.41% 1) Depreciable Base (200000+10000+30000) 2,40,000 2) Year 0 1 2 3 4 Depreciation rate 33.33% 44.45% 14.81% 7.41% Depreciable Base 240000 Annual depreciation 79992 106680 35544 17784 3) Annual sales revanue Sales Units 1250 1250 1250 1250 Selling price per unit 200 200 200 200 Sales Revanue 250000 250000 250000 250000 4) Annual cost of Goods sold Sales Units 1250 1250 1250 1250 Cost price per unit 100 100 100 100 COGS 125000 125000 125000 125000 5) Annual operating cash flows - Annual Sales Revanue 250000.00 250000.00 250000.00 250000.00 Annual Cost of goods sold 125000.00 125000.00 125000.00 125000.00 Annual Depreciation 79992.00 106680.00 35544.00 17784.00 EBT 45008.00 18320.00 89456.00 107216.00 Less: Tax @ 40% 18003.20 7328.00 35782.40 42886.40 PAT 27004.80 10992.00 53673.60 64329.60 Add: Depreciation 79992.00 106680.00 35544.00 17784.00 Operating cash flows 106996.80 117672.00 89217.60 82113.60 6,7,8) NWC At the beginning of year Year 0 1 2 3 4 NWC At the beginning of year 0.00 30000.00 30000.00 30000.00 30000.00 Target NWC - 12% of sales (t+1) 30000.00 30000.00 30000.00 30000.00 0.00 Annual investment in NWC 30000.00 0.00 0.00 0.00 -30000.00 Closing balance 30000.00 30000.00 30000.00 30000.00 0.00 (-ve value shows recovery of NWC) 9) Salvage value (Post tax) 25000 x (1- 0.4)= 15000 10) Annual Net cash flow Operating cash flows 0.00 106996.80 117672.00 89217.60 82113.60 Depreciable Base -240000 0 0 0 0 Annual investment in NWC -30000.00 0.00 0.00 0.00 30000.00 Salvage value (Post tax) 0 0 0 0 15000 Net Cash Flows -270000.00 106996.80 117672.00 89217.60 127113.60 11) Net Cash Flows -270000 106996.8 117672 89217.6 127113.6 PV Factors @ 10% 1 0.909090909 0.826446281 0.751314801 0.683013455 Pv of Net cash flows -270000 97269.81818 97249.58678 67030.50338 86820.29916 NPV = Sum of PV of Net cash flows = 78370.2075 IRR = IRR is the rate at which Outflow = Inflow Or NPV = 0 Year Net cash flows PV Factors Present value 22% 23% 22% 23% 0 -270000.00 1 1 -270000 -270000 1 106996.80 0.819672131 0.81300813 87702.29508 86989.26829 2 117672.00 0.671862403 0.66098222 79059.39264 77779.09974 3 89217.60 0.550706887 0.537383918 49132.74679 47944.10347 4 127113.60 0.451399088 0.436897495 57378.96311 55535.61337 3273.397625 -1751.915121 r= NPV = 22% 3273.397625 r 0 23% -1751.915121 r-22/23-22 = (0-3273.3976)/(-1751.9151) r-22 = 0.6514 x 1 r = 22+ 0.6514 r = 22.65% Approx IRR = 22.65% NPV = 78370.2075 Please provide feedback…. Thanks in advance…. :-)
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