Question

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $465,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $69,000 at the end of the project in 5 years. Sales would be $307,000 per year, with annual fixed costs of $55,000 and variable costs equal to 36 percent of sales. The project would require an investment of $41,000 in NWC that would be returned at the end of the project. The tax rate is 23 percent and the required return is 9 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

To calculate the NPV of the project, subtract expenses from sales revenue to find the net cash flow for each year. Discount each net cash flow back to the present value and sum up all the present values to get the NPV. In this case, the NPV is $457,714.69.

Step-by-step explanation:

To calculate the NPV of the project, we need to calculate the net cash flows for each year by subtracting the expenses (fixed costs + variable costs) from the sales revenue. Then, we discount each net cash flow back to the present value using the required return rate. Finally, we sum up all the present values to get the NPV.

1. Calculate the net cash flows for each year: Sales revenue - Expenses = Net cash flow
2. Discount each net cash flow back to the present value using the required return rate: Net cash flow / (1 + required return rate)^year
3. Sum up all the present values to get the NPV

In this case, the net cash flows and their present values are:

Year 1: Net cash flow = $307,000 - ($55,000 + 0.36*$307,000) = $113,720

Present value = $113,720 / (1 + 0.09)^1 = $104,200.34

Year 2: Net cash flow = $307,000 - ($55,000 + 0.36*$307,000) = $113,720

Present value = $113,720 / (1 + 0.09)^2 = $95,782.14

Year 3: Net cash flow = $307,000 - ($55,000 + 0.36*$307,000) = $113,720

Present value = $113,720 / (1 + 0.09)^3 = $88,374.93

Year 4: Net cash flow = $307,000 - ($55,000 + 0.36*$307,000) = $113,720

Present value = $113,720 / (1 + 0.09)^4 = $81,898.19

Year 5: Net cash flow = $307,000 - ($55,000 + 0.36*$307,000) + $69,000 = $121,720

Present value = $121,720 / (1 + 0.09)^5 = $87,459.09

Finally, sum up all the present values to get the NPV: NPV = $104,200.34 + $95,782.14 + $88,374.93 + $81,898.19 + $87,459.09 = $457,714.69

Answer 2

NPV: 51,334.24

Step-by-step explanation:

Investment

465,000

100% bonus depreciation tax shield: 465,000 x 23% = 106,950

cash inflow per year:

sales 307,000

variable 36% of sales:(110,520)

fixed cost (55,000)

earning before tax: 141,480

tax expense 23% (32,540.4)

earning after tax 108,939.6‬

This income will come during 5 years. We will discount at 9%

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 108,940

time 5

rate 0.09

`108939.6 * (1-(1+0.09)^(-5) )/(0.09) = PV\\`

PV $423,737.0528

Then we calculate the release of the working capital at the end of the project as a lump sum:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 41,000.00

time 5.00

rate 0.09

`(41000)/((1 + 0.09)^(5) ) = PV`

PV 26,647.19

Now, we calculate the NPV:

investment - working capital + present value of cash inflow + release of WC

-465,000 -41,000 + 106,950 + 423,737.05 + 26,647.19

NPV: 51,334.24