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

Business

Edgar Erickson

12 February, 10:27

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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Athena Bullock · 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