000 an of machinery s0at year ars and will be deprociaed all

000, an of machinery s,0at year ars, and will be deprociaed allx with the straight line method tax beacket, and its wACC is 0% Shmdd they purchase the laitial cash outflow. Le. CFot e t ANowC) (3 ps) b) What is the depreciation for each year of the project? (2 ps) c) Find the incremental operating cash reverse ?NOWC) (4 pes) nows (Hint do not foret about terminal cash flow adjustments, i.e. CF OCFt terminal CF adjustments d) What is the net present value of the project? What is the decision on the project? (1 pty

Solution

Initial cash outflow = Cost of machine + installation cost - working capital

Initial cash outflow = 450,000 + 50,000 - 25,000

Initial cash outflow = $475,000

b)

Depreciation = ( cost of machine + installation cost ) / number of years

Depreciation = ( 450,000 + 50,000) / 4

Depreciation = 500,000 / 4

Depreciation = 125,000

c)

Operating cash flow from 1-3 = ( revenue - depreciation)( 1 -tax) + Depreciation

Operating cash flow = ( 350,000 - 125,000)( 1 - 0.4) + 125,000

Operating cash flow = 135,000 + 125,000

Operating cash flow for 1-3 = 260,000

Terminal year cash flow = -25,000

Cash flow for year 4 = 260,000 - 25,000

Cash flow for year 4 = 235,000

Please note: although the net working capital have the same signs at initiaon and termination, at initiation, cash outflow decreases because working capital increases and at termination, cash inflow decreases because working capital increases.

d)

NPV = Present value of cash inflows - present value of cash outflows

NPV = -475,000 + 260,000 / ( 1 + 0.06)¹ + 260,000 / ( 1 + 0.06)² + 260,000 / ( 1 + 0.06)³ + 235,000 / ( 1 + 0.06)⁴

NPV = $406,125.11

Project should be accepted as it has a positve NPV.