question archive As a financial analyst, you have been contracted by Thanos Marvel Inc
As a financial analyst, you have been contracted by Thanos Marvel Inc
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As a financial analyst, you have been contracted by Thanos Marvel Inc. to analyze their potential expansion project. The relevant data are shown below. In order to secure the project, the company will have to purchase a new equipment. The equipment has a 3-year tax life and would be depreciated using the straight-line method over 3 years. The equipment will have a salvage value at the end of Year 3. In addition, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? WACC 12.0% Net investment in fixed assets (depreciable basis) $80,000 Required new working capital $10,000 Straight-line depreciation rate 30% Sales revenues, each year $75,000 Operating costs (excl. depreciation.), each year $35,000 Expected pretax salvage value $5,000 Tax rate 40.0%
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| Answer to the question | |||||
| Particulars | Amount | ||||
| Sales Revenue | 75000 | ||||
| Operating cost (Excluding Dep) | 35000 | ||||
| Contribution | 40000 | ||||
| Initial investment | 80000 | ||||
| Salvage Value | 5000 | ||||
| Depreciation per year | 25000 | ||||
| Calculation of NAV of project | |||||
| NAV = PV of future cash flow - initial investment | |||||
| Year | Contribution | Depreciation | EAT (Contribution-depreciation)*(1-tax@40%) | Cash flow before tax EAT+Depreciation+Working capital recovery+Salvage vaule |
PV of cash flow @12% |
| - | - | - | -90,000 | -90,000 | |
| 1 | 40,000 | 25,000 | 9,000 | 34,000 | 30,357 |
| 2 | 40,000 | 25,000 | 9,000 | 34,000 | 27,105 |
| 3 | 40,000 | 25,000 | 9,000 | 49,000 | 34,877 |
| 2,339 | |||||
