A firm is considering a replacement project which requires the initial outlay of $300,000 which includes both an after-tax salvage from the old asset of $12,000 and an additional working capital investment of $8,000. The 12-year project is expected to generate annual incremental cash flows of $54,000 and have an expected terminal value at the end of the project of $20,000. The cost of capital is 15 percent, and the firm's marginal tax rate is 40 percent. Calculate the net present value of this project.

Question

Talia Bautista

Business

5 July, 22:20

A firm is considering a replacement project which requires the initial outlay of $300,000 which includes both an after-tax salvage from the old asset of $12,000 and an additional working capital investment of $8,000. The 12-year project is expected to generate annual incremental cash flows of $54,000 and have an expected terminal value at the end of the project of $20,000. The cost of capital is 15 percent, and the firm's marginal tax rate is 40 percent. Calculate the net present value of this project.

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Answers (1)

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Lennon Oliver · Answer 1

-3,548.43

Explanation:

DF = Discount factor

Year Cash flow DF (15%) Present Value

0 (300,000) 1 - 300,000

1 54,000 0.870 46,956.52

2 54000 0.756 40,831.76

3 54000 0.658 35,505.88

4 54,000 0.572 30,874.68

5 54000 0.497 26,847.54

6 54000 0.432 23,345.69

7 54000 0.376 20,300.06

8 54000 0.327 17,652.70

9 54000 0.284 15,350.17

10 54000 0.247 13,347.97

11 54000 0.215 11,606.93

12 74000 0. 187 13,831.13

Year 12 calculation = 54000 + 20000 x 0.6 + 8000

= 74000

NPV = - 300,000 + 46,956.52 + 40,831.76 + 35,505.88 + 30,874.68 + 26,847.54 + 23,345.69 + 20,300.06 + 17,652.70 + 15,350.17 + 13,347.97 + 11,606.93 + 13,831.13

NPV = - 3,548.43