You are evaluating a capital project with a Net Investment of $800,000, which includes an increase...

3.9 Ratings (587 Votes)

Answer: Depreciation yearly = (Investment value- salvage value)/ (No of years) = (800000-100000) /20 = 35000

Present value Formula = Cash Flow/(1+ Discount rate) ^(no of years)

Discount rate = 12%

Tax rate = 40%

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
Initial Investment	-800000
Working Capital Increase	-8000																				8000
Salvage Value																					100000
Revenues		120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000	120000
Operating Expenses		14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000	14000
Gross Income (revenue - Expenses)		106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000	106000
Depreciation		35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000
Taxable Income (Gross Income - Dep)		71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	71000	179000
Tax (40% * taxable Income)		28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	28400	71600
Net Income		42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	42600	107400
Cash Flow(Add back Depreciation)	-808000	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	77600	142400
Present value (Cash Flow/(1+0.12)^no of years	-808000	69285.71	61862.24	55234.15	49316.2	44032.32	39314.58	35102.3	31341.34	27983.34	24985.12	22308.15	19917.99	17783.92	15878.5	14177.23	12658.24	11302	10091.07	9009.886	14762.15
NPV (Sum of all present values)	-221653.57

Net present value is coming out to be -221653.57. Negative value represents that it is not beneficial for us to Opt for the project.

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