Lakeside winery is considering expanding its winemaking operations. The expansio

Question

Lakeside winery is considering expanding its winemaking operations. The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $38,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?

-$14,162

-$8,309

-$2,747

$2,311

$3,615

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Investment = -649000 - 38000 = -687000

Annual Cash Inflows = 198500

Final Year Cash Inflow = 198500 + 38000 + 187000*(1-.35) = 358050

NPV = -687000 + 198500/(1+.14)^1 + 198500/(1+.14)^2 + 198500/(1+.14)^3 + 358050/(1+.14)^4 = -14162

Option A (-14162) is the correct answer.

Thanks.

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