A project has an initial requirement of $196211 for new equipment and $14142 for
ID: 2812726 • Letter: A
Question
A project has an initial requirement of $196211 for new equipment and $14142 for net working capital. The installation costs to get the new equipment in working condition are 9268. The fixed assets will be depreciated to a zero book value over the 5-year life of the project and have an estimated salvage value of $144808. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $95719 and the cost of capital is 10% What is the project's NPV if the tax rate is 39%?
Explanation / Answer
Depreciation=(196211+9268-144808)/5=12134.2
Annual after tax cash flows=(95719-12134.2)*(1-39%)+12134.2=63120.928
NPV=-196211-9268-14142+63120.928/0.10*(1-1/1.1^5)+9268/1.1^5+144808/1.1^5=1541162.2529543
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