Howell Petroleum is considering a new project that complements its existing busi

Question

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.81 million. The marketing department predicts that sales related to the project will be $2.51 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 20 percent of sales. Howell also needs to add net working capital of $160,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 34 percent. The required rate of return for Howell is 16 percent. What is the NPV for this project? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

Please explain steps! Thanks!

I was able to get down to determining Net income of 886620, OCF of 1839120, and when I go to do the NPV the equation the book gives me to use is (3970000) + (OCF*(PVIFA16%,4)+(160000/1.164) (3970000 is the total cash outlay and 160000 is the net working capital recovered. When I look up the pvifa or the pvif neither one works in the examples to get their answer so i don;t know if the equation is wrong or if there is a better way to do it. Please help!

Explanation / Answer

Computation of annual cash inflows:

Present value of cash inflows = Annual cash inflows x PVIFA16%, 4 years + Working capital released x PVIF16%, 4th year = 1,649,130 x 2.7982 + 160,000 x 0.5523 = $ 4,614,595.57 + $ 88,368 = $ 4,702,963.57

Present value of cash outflows = $ 3,810,000 + $ 160,000 = $ 3,970,000

Net present value (NPV) = $ ( 4,702,963.57 - 3,970,000) = $ 732,963.57

$ Sales 2,510,000 Cost of goods sold and operating expenses 502,000 Depreciation expense 952,500 Earnings before tax 1,055,500 Tax @ 34% 358,870 Net income 696,630 Depreciation expense 952,500 Annual cash inflows 1,649,130

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