3. Hyper Mega Awesome Value Inc. is evaluating a project proposal. The project is expected to...

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3. Hyper Mega Awesome Value Inc. is evaluating a projectproposal. The project is expected to require purchasing long-termassets with an installed cost of $400,000. It will also require anincrease in Net Working Capital of $25,000. At the end of the 4thyear, the project will be terminated. Selling the assets willresult in an after-tax gain of $15,000. The project is expected togenerate annual after-tax operating cash flows of $160,000 eachyear for 4 years. Hyper Mega Awesome Value Inc requires a return oncapital projects of 11%. Should they make the investment?

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4.4 Ratings (746 Votes)

Time line		0	1	2	3	4



Cost of new machine		-400000
Initial working capital		-25000
=Initial Investment outlay		-425000

after tax operating cash flow			160000	160000	160000	160000

reversal of working capital						25000

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					15000
+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						40000

Total Cash flow for the period		-425000	160000	160000	160000	200000
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704
Discounted CF=	Cashflow/discount factor	-425000	144144.1	129859.6	116990.62	131746.19
NPV=	Sum of discounted CF=	97740.5493

Accept project as NPV is positive

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Transcribed Image Text

3. Hyper Mega Awesome Value Inc. is evaluating a projectproposal. The project is expected to require purchasing long-termassets with an installed cost of $400,000. It will also require anincrease in Net Working Capital of $25,000. At the end of the 4thyear, the project will be terminated. Selling the assets willresult in an after-tax gain of $15,000. The project is expected togenerate annual after-tax operating cash flows of $160,000 eachyear for 4 years. Hyper Mega Awesome Value Inc requires a return oncapital projects of 11%. Should they make the investment?