SNS Air is considering a new project. The project will require $110,000 for new
ID: 2783679 • Letter: S
Question
SNS Air is considering a new project. The project will require $110,000 for new fixed assets. There isa total of $5,000 combined increase in inventories and account receivables which is partly financed by 2,000 increase in account payables. The project has a 6-year life. The fixed assets will be depreciated using 7-year MACRS to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of 300 units and the selling price per unit is $1,200 while the variable cost per unit is expected to be $1,000. Annual fixed costs are expected to be $10,000. The tax rate is 35 percent and the required rate of return (cost of capital) is 12 percent. Calculate the project's initial investment costs, annual incremental operating cash flows, and terminal cash flows. What are project's NPV and IRR?Explanation / Answer
Given the 7-year MACRS, annual depreciation = Investment x MACRS (%)
Book Value of asset after 6 years = 4.46% x 110,000 = 4,906
Cash Flows = Net Income + Depreciation + Investment + NWC + After-tax salvage value
NPV and IRR can be calculated using NPV and IRR functions in excel or calculator.
SNS Air 0 1 2 3 4 5 6 7 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Investment -110,000 4906 NWC -3000 3000 Salvage 22000 Sales 360000 360000 360000 360000 360000 360000 VC -300000 -300000 -300000 -300000 -300000 -300000 FC -10000 -10000 -10000 -10000 -10000 -10000 Depreciation -26939 -19239 -13739 -9823 -9812 -9823 EBT 23061 30761 36261 40177 40188 40177 Tax (35%) -8071.35 -10766.4 -12691.4 -14062 -14065.8 -14062 Net Income 14989.65 19994.65 23569.65 26115.05 26122.2 26115.05 Cash Flows -113,000 41928.65 39233.65 37308.65 35938.05 35934.2 54955.15 NPV $53,339.98 IRR 27.13%Related Questions
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