Delia Landscaping is considering a new 4year project The nec

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $203,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $140,000, variable costs of $37,900, and fixed costs of $13,050. The project will also require net working capital of $3,650 that will be returned at the end of the project. The company has a tax rate of 40 percent and the project\'s required return is 11 percent. What is the net present value of this project?

Solution

Step-1:Calculation of Operating cash flow for the year Year 1 2 3 4 Sales $         1,40,000 $   1,40,000 $   1,40,000 $   1,40,000 Variable cost               -37,900          -37,900          -37,900          -37,900 Fixed Costs               -13,050          -13,050          -13,050          -13,050 Depreciation               -67,660          -90,234          -30,064          -15,042 Profit Before tax                 21,390            -1,184           58,986           74,008 Tax Expense                  -8,556                 473          -23,594          -29,603 Net Income                 12,834                -710           35,391           44,405 Depreciation                 67,660           90,234           30,064           15,042 Operating cash flow                 80,494           89,523           65,456           59,447 Working: Depreciation Schedule: Year Cost Depreciation rate Dereciation Expense 1             2,03,000 33.33%           67,660 2             2,03,000 44.45%           90,234 3             2,03,000 14.81%           30,064 4             2,03,000 7.41%           15,042 Step-2:Calculation of net present value Year 0 1 2 3 4 Total Operating cash flow $       80,494 $       89,523 $       65,456 $       59,447 Fixed Asset $       -2,03,000 Net Working capital $             -3,650 Release of net working capital $         3,650 Cash flow $       -2,06,650 $       80,494 $       89,523 $       65,456 $       63,097 Discount factor                 1.0000           0.9009           0.8116           0.7312           0.6587 Present Value $       -2,06,650 $       72,517 $       72,659 $       47,861 $       41,564 $ 27,951 Thus, Net Present Value is $ 27,951