EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
Question
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Chapter 11, Problem 10P

a)

Summary Introduction

To determine: Net present value of the project.

a)

Expert Solution
Check Mark

Explanation of Solution

Given information:

Initial investment cost is $200,000

Increase in working capital is $40,000

Tax rate is 40%,

Project’s required rate of return is 15%

Calculation of net investment:

Net investment=Initial investment+net increase in WC=$200,000+$40,000=$240,000

Calculation of depreciation:

Depreciation=Initial investmentLife=$200,00010=$20,000

Formula for calculating net cash flows:

Net cash flow=Δoperating earnings after taxes+ΔdepreciationΔnet working capital 

Calculation of net cash flows from year 1 to 5:

Net cash flow=ΔRevenuesΔoperating costsΔdepreciation×1t+Δdepreciation=$200,000$90,000$20,000×10.4+$20,000 =$74,000

Calculation of net cash flows from year 6 to 9:

Net cash flow=ΔRevenuesΔoperating costsΔdepreciation×1t+Δdepreciation=$210,000$105,000$20,000×10.4+$20,000 =$71,000

Calculation of net cash flows from year 10:

Net cash flow=Δoperating earnings after taxes+ΔdepreciationΔNWC+salvage valueTax on sale of assets×1t=$71,000+$50,000×10.4+$40,000 =$141,000

Calculation of net cash present value at 15%:

NPV=C0+C151+15%15+C691+15%69+.....+C101+15%10=$240,000+$74,0003.352+$71,0002.8550.497+$141,0000.247 =$143,619

Therefore, net present value at 15% is $143,619

b)

Summary Introduction

To determine: Net present value when discount rate is 24%.

b)

Expert Solution
Check Mark

Explanation of Solution

Calculation of net cash present value at 15%:

NPV=C0+C151+24%15+C691+24%69+.....+C101+24%10=$240,000+$74,0002.745+$71,0002.4040.341+$141,0000.116 =$37,689

Therefore, net present value at 24% is $37,689

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