Homework SourseLakeside Winery is considering expanding its winemaking oper
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $665,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $176,000 at the end of the project. The project requires $46,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $151,600 a year. What is the net present value of this project if the relevant discount rate is 12 percent and the tax rate is 40 percent?
?$10,905
?$12,925
?$9,815
–$11,632
?$13,919
Solution
?$10,905
Working:
| Net Present Value is calculated as follows: | ||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | Total | ||
| Operating cash flow | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | ||||
| Investment in new fixed assets | $ -6,65,000 | |||||||||
| Investment in net working capital | $ -46,000 | |||||||||
| Release of net working capital | $ 46,000 | |||||||||
| After tax sael of equipment | $ 1,05,600 | |||||||||
| Total cash flow | $ -7,11,000 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 1,51,600 | $ 3,03,200 | |||
| Discount factor @ 12% | 1.0000 | 0.8929 | 0.7972 | 0.7118 | 0.6355 | 0.5674 | 0.5066 | |||
| Present Value | $ -7,11,000 | $ 1,35,357 | $ 1,20,855 | $ 1,07,906 | $ 96,345 | $ 86,022 | $ 1,53,611 | $ -10,905 | ||
| Working; | ||||||||||
| After tax sale proceeds | = | $ 1,76,000 | x | (1-0.40) | = | $ 1,05,600 | ||||
