Lakeside Winery is considering expanding its winemaking operations. The expansio

Question

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $643,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $168,000 at the end of the project. The project requires $38,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $197,400 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?

?$22,138

?$18,679

–$19,924

?$23,841

?$16,811

Explanation / Answer

?$18,679

Working:

Net Present Value is calculated as follows: Year 0 1 2 3 4 Total Operating cash flow $       1,97,400 $    1,97,400 $    1,97,400 $    1,97,400 Investment in new fixed assets $    -6,43,000 Investment in net working capital $       -38,000 Release of net working capital $       38,000 After tax sale of equipment $    1,09,200 Total cash flow $    -6,81,000 $       1,97,400 $    1,97,400 $    1,97,400 $    3,44,600 Discount factor @ 14%             1.0000               0.8772            0.7695            0.6750            0.5921 Present Value $    -6,81,000 $       1,73,158 $    1,51,893 $    1,33,239 $    2,04,031 $   -18,679 Working; After tax sale proceeds = $       1,68,000 x (1-0.35) = $    1,09,200

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