Homework SourseLakeside Winery is considering expanding its winemaking oper
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $643,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $168,000 at the end of the project. The project requires $38,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $197,400 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?
?$22,138
?$18,679
–$19,924
?$23,841
?$16,811
Solution
?$18,679
Working:
| Net Present Value is calculated as follows: | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | Total | ||
| Operating cash flow | $ 1,97,400 | $ 1,97,400 | $ 1,97,400 | $ 1,97,400 | ||||
| Investment in new fixed assets | $ -6,43,000 | |||||||
| Investment in net working capital | $ -38,000 | |||||||
| Release of net working capital | $ 38,000 | |||||||
| After tax sale of equipment | $ 1,09,200 | |||||||
| Total cash flow | $ -6,81,000 | $ 1,97,400 | $ 1,97,400 | $ 1,97,400 | $ 3,44,600 | |||
| Discount factor @ 14% | 1.0000 | 0.8772 | 0.7695 | 0.6750 | 0.5921 | |||
| Present Value | $ -6,81,000 | $ 1,73,158 | $ 1,51,893 | $ 1,33,239 | $ 2,04,031 | $ -18,679 | ||
| Working; | ||||||||
| After tax sale proceeds | = | $ 1,68,000 | x | (1-0.35) | = | $ 1,09,200 | ||
