Question

Margarite's Enterprises is considering a new project that will require $345,000 for new fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $110,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to zero over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $550,000 and costs of $430,000. The tax rate is 35 percent and the required rate of return is 15 percent.What is the amount of the aftertax cash flow from the sale of the fixed assets at the end of this project?

Answer 1

Answer:

NPV = (53,222.44)

Explanation:

Net fixed asset                              345,000

Working capital

160,000 inventory + 35,000 Ar =   195,000

short term deb                                 (110,000)

net working capital                           85,000

Total investment                            430,000

salvage value 345,00 x 25% = 86,250

release of the working capital  85,000

Cash flow at end of project      171,250

annual cash flow

sales             550,000

cost              (430,000)

depreciation    69,000

EBT                   51,000

tax expense 35%

                        (17,850)

net income       33,150

+ dep                 69,000

cash flow           102,150

Now we calculate the present value of the net cash flow and the present alue fothe end of the project

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 102150

time 4

rate 0.15

$102150 \times \frac{1-(1+0.15)^{-4} }{0.15} = PV$

PV $291,636.04

$\frac{Principal}{(1 + rate)^{time} } = PV$  

Principla (sum of salvage and released Working capital   171,250.00

time   5.00

rate   0.15

$\frac{171250}{(1 + 0.15)^{5} } = PV$  

PV   85,141.52

NPV = 291,636.04 + 85,141.52 - 430,000 = (53,222.44)