Question1 Brar Project This company is planning to invest in a project calledBra

Question

Question1 Brar Project This company is planning to invest in a project calledBrar. The management accounting department received the following information Capex Project period Revenue Supplies expense Salary Utilities Discount Rate Sale of asset@end of project $4000 Net working Capital The company's tax rate is 17%. The project also earned $3200 as $24000 6 years $7000 500 1500 800 10% $4500 interest revenue. The capital expenditure is depreciated using straight line method over the project and will have a residual value of $5000 the company will have to a rent for $1000 during the project life. REQUIRED a) Calculate the initial investment b) Calculate each year cash flow c) Calculate the terminal value of the asset used d) Calculate the NPV e) Calculate the Profitability Index [PI]

Explanation / Answer

a) Initial investment: Capex 24000 Net working capital 4500 Initial investment 28500 b) 1 2 3 4 5 6 Revenue 7000 7000 7000 7000 7000 7000 Interest income 3200 3200 3200 3200 3200 3200 Total revenue 10200 10200 10200 10200 10200 10200 Expenses: Supplies 500 500 500 500 500 500 Salary 1500 1500 1500 1500 1500 1500 Utilities 800 800 800 800 800 800 Depreciation [(24000-5000)/6] 3167 3167 3167 3167 3167 3167 Total operating expenses 5967 5967 5967 5967 5967 5967 Operating income before tax 4233 4233 4233 4233 4233 4233 Tax at 17% 720 720 720 720 720 720 NOPAT 3514 3514 3514 3514 3514 3514 Add: Depreciation 3167 3167 3167 3167 3167 3167 Annual cash flows after tax 6680 6680 6680 6680 6680 6680 c) Terminal cash flows: Sale value of the asset 4000 Book Value of the asset 5000 Loss on sale 1000 Tax shield on loss at 17% 170 After tax sale value = 4000+170 = 4170 Release of NWC 4500 Terminal after tax cash flow 8670 d) PV of annual cash flows = 6680*(1.1^6-1)/(0.1*1.1^6) = 29093 PV of terminal cash inflow = 8670/1.1^6 = 4894 Total PV of cash inflows 33987 Less: Initial investment 28500 NPV 5487 d) PI = PV of cash inflows/Initial investment = 33987/28500 = 1.19

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