2 answers

NPV

Question:

Majestic Theaters is considering investing in some new projection equipment whose data are shown below. The required equipment has a 3-year tax life and would be fullydepreciated by the straight-line method over the 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closeddown. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected tobe constant over the project's 3-year life. What is the project's NPV?
WACC 10.0%
Net investment in fixed assets (depreciable basis) $65,000
Required new working capital $10,000
Straight line depr'n rate 33.333%
Sales revenues, each year $70,000
Operating costs excl. depr'n, each year $25,000
Expected pretax salvage value $5,000
Tax rate 35.0%

Answers

Year

Sales revenues

70000

0

-65000

Depreciation Rate = 33.333%

-25000

1

36883

Operating income (EBIT)

-21665

2

36883

Operating profit /ebit

23336

3

36883

Taxes Rate = 35%

-8167

Profit After-tax

15168

Add depreciation

21665

Operating net cash flow

36883

answer = $ 26 584---NPV

.

Year123
Outflow of working capital (a)(10,000.00)
Outfloe in fixed assets (b)(65,000.00)
Release of working capital ( C )10,000.00
Sales revenue70,000.0070,000.0070,000.00
Less: Operating cost25,000.0025,000.0025,000.00
Depreciation21,666.4521,666.4521,666.45
Profit before tax23,333.5523,333.5523,333.55
Tax @ 35%8,166.748,166.748,166.74
Profit after tax15,166.8115,166.8115,166.81
Inflow =(Profit after tax+depreciation) (d)36,833.2636,833.2636,833.26
Salvage proceeds received5,000.00
Tax on salvage proceeds @ 35%1,750.00
Net inflow from salvage proceed (e)3,250.00
Net inflow/(outflow),f = (a+b+c+d+e)(38,166.74)36,833.2650,083.26
Discounting factor @10% ,g0.910.830.75
Present value of net inflow/(outflow) (f*g)(34,697.04)30,424.2737,612.53
Therfore total Net present value= -34,697.038+30,424.271+37,612.526
33,339.76
.

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