What is the Net Present Value for project X and Y? 2. A project requires an init

Question

What is the Net Present Value for project X and Y?

2. A project requires an initial investment of $50,000 and is expected to produce a cash flow before tax of $20,000 per year for three years. The project?s opportunity cost of capital is 7%. a. Assume Company X does not pay any tax. For Company X, what is the Net Present Value (NPV) of this project? b. Assume Company Y is consistently profitable, pays tax at the rate of 35%, and can depreciate the $50,000 initial investment according to the three-year Modified Accelerated Cost Recovery System (MACRS) schedule, which allows depreciation of 33.33% at t=1, 44.45% at t=2, 14.81% at t=3, and 7.41% at t=4. For Company Y, what is the Net Present Value (NPV) of this project? What is the Net Present Value for project X and Y?

Explanation / Answer

a. NPV =- initial investment + PV of future cash flows

= - initial investment +

K = N          
[(cash flow)/(1 + cost of capital)^k]    
                                   k=1

  =- 50000 +

K = 3
= [(20000)/(1 +7/100)^k]    
                                   k=1

= 2486.32

2)

Time line 0 1 2 3 Cost of equipment -50000 Installation cost 0 Total investment in new machine -50000 Net working capital 0 =Initial Investment outlay -50000 Profit= 20000 20000 20000 MACR rate 33% 44% 14.81% 7.41% -depreciation MACR* cost of equipment -16665 -22225 -7405 3705 =salvage value = 3335 -2225 12595 -taxes =(profit- depreciation)*(1-tax) 2167.75 -1446.25 8186.75 +Depreciation 16665 22225 7405 =after tax operating cash flow 20000 20778.75 15591.75 Reversal of Net working capital 0 Proceeds from sale of assets =selling price*(1 - tax rate) 0 +Salvage book value * tax rate 1296.75 Terminal year non operating cash flows 1296.75 Total Cash flow for the period -50000 20000 20778.75 16888.5 Discount factor =(1+discount rate)^n 1 1.07 1.1449 1.225043 Discount rate= 7% Discounted cash flows -50000 18691.59 18148.96 13786.05 NPV= Sum of discounted cash flows 626.6005

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