Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. gnuyak industries is considering a new project tha

GnuYak Industries is considering a new project that will last for three years. This project requires...

Free

90.2K

Verified Solution

Question

Finance

GnuYak Industries is considering a new project that will lastfor three years. This project requires an initial investment in amachine that costs £90,000 immediately (year 0) and will bedepreciated in straight line over its three-year life to a residualvalue of 0. The management expects this project will result insales of £100,000 and cost of goods sold will be 50% of sales eachyear. This project also requires a total net working capital of£10,000 in year 0 which will be fully recovered in year 3. GnuYakis in the 35% corporate tax bracket.

a. Calculate the total Free Cash Flows for each year of this newproject.

b. Suppose that the appropriate discount rate for this projectis 10%, calculate the NPV of this project.

Answer & Explanation Solved by verified expert
4.4 Ratings (812 Votes)

Time line 0 1 2 3
Cost of new machine -90000
Initial working capital -10000
=Initial Investment outlay -100000
Sales 100000 100000 100000
Profits Sales-variable cost 50000 50000 50000
-Depreciation Cost of equipment/no. of years -30000 -30000 -30000
=Pretax cash flows 20000 20000 20000
-taxes =(Pretax cash flows)*(1-tax) 13000 13000 13000
+Depreciation 30000 30000 30000
=a. FCF 43000 43000 43000
reversal of working capital 10000
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 10000
Total Cash flow for the period -100000 43000 43000 53000
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331
Discounted CF= Cashflow/discount factor -100000 39090.90909 35537.19 39819.684
b. NPV= Sum of discounted CF= 14447.78

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

GnuYak Industries is considering a new project that will lastfor three years. This project requires an initial investment in amachine that costs £90,000 immediately (year 0) and will bedepreciated in straight line over its three-year life to a residualvalue of 0. The management expects this project will result insales of £100,000 and cost of goods sold will be 50% of sales eachyear. This project also requires a total net working capital of£10,000 in year 0 which will be fully recovered in year 3. GnuYakis in the 35% corporate tax bracket.a. Calculate the total Free Cash Flows for each year of this newproject.b. Suppose that the appropriate discount rate for this projectis 10%, calculate the NPV of this project.

Other questions asked by students

Q

Explain counter or back e.m.f. in d.c. motor and state its importance.

Electrical Engineering
Q

The World Bank collected data on the percentage of GDP that a country spends on health...

Basic Math
Q

What makes information valuable to decision makers? What makes it useful?

General Management
Q

Rose Merchandising Company buys and sells a product called Zoom. Company began the 2018 accounting year...

Accounting
Q

Before 1980 it could take hundreds of hours to track the movements of participants in...

Biology
Q

A spherical conducting shell of inner radius r and outer radius r2 has a charge...

Physics
Q

You are driving at the speed of 29.3 m/s (65.5562 mph) when suddenly the car...

Physics
Q

Find the polar coordinates of the following rectangular coordinates 12 1 01

Calculus
Q

The following information applies to the questions displayed below.] Warnerwoods Company uses a...

Accounting
Q

The Production Degartment of Christphor Manufacturing has pepared the following schedule of units to bo...

Accounting
Q

Using semiannual compounding, find the prices of the following bonds: a. A 9.4%,15-year bond priced...

Accounting
Q

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares...

Accounting