Lakeside Grapes is considering expanding its wine-making operations. They would
ID: 2634111 • Letter: L
Question
Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $310 thousand that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated pre-tax salvage value is $60 thousand. The project requires $36 thousand initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $153 thousand a year. What is the net present value of this project if the relevant discount rate is 17.9 percent and the tax rate is 33 percent? (Enter answer in thousands.)
Explanation / Answer
Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $310 thousand that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated pre-tax salvage value is $60 thousand. The project requires $36 thousand initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $153 thousand a year. What is the net present value of this project if the relevant discount rate is 17.9 percent and the tax rate is 33 percent? (Enter answer in thousands.)
Answer
(All figure in thousand)
Initial cash outflow = New Equipment Cost + Working Capital Required
Initial cash outflow = 310 + 36
Initial cash outflow = 346
Operating Cash flow = 153 (It is after tax cash flow)
Pre tax salvage Value = 60
Post tax salvage Value = 60*(1-33%) = 40.20
Terminal Value = Post tax salvage Value + Working Capital Realised
Terminal Value = 40.20 + 36
Terminal Value = 76.20
NPV = -346 + 153/1.179 + 153/1.179^2 + 153/1.179^3 + 153/1.179^4 + 153/1.179^5 + 76.20/1.179^5
NPV = $ 166.99
Answer
NPV = $ 166.99
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