2. Marie\'s Fashions is considering a project that will cost $87,000 and require
ID: 2786228 • Letter: 2
Question
2. Marie's Fashions is considering a project that will cost $87,000 and require $28,000 in Net Working Capital. The project is expected to produce annual sales of $75,000 with associated costs of S57,000. The project has a 5-year life. The annual depreciation charge will be $17,400. The tax rate is 30 percent. What is the operating cash flow for this project? De A. -$1,520 B. -$580 C. $420 D. $15,680 E. $17,820 -ann nal cases : 3. Assuming no recovery of Net Working Capital at the end of the project, and using a required rate of return of 12%, what is the above project's NPV, IRR, and should the project be accepted?Explanation / Answer
2.
Annual sales
$ 75,000
Less: Annual cost
$ 57,000
Less: Depreciation
$ 17,400
EBIT
$ 600
Less: Tax (@30%)
$ 180
Add: Depreciation
$ 17,400
Net annual Profit
$ 17,820
Hence option E “$ 17,820” is correct answer.
3.
Year
Cash Flow
PV Factor Formula
PV Factor @ 12 %
PV
0
$ (115,000)
1/(1+0.12)^0
1.00000
$ (115,000.00)
1
$ 17,820
1/(1+0.12)^1
0.89286
$ 15,910.71
2
$ 17,820
1/(1+0.12)^2
0.79719
$ 14,205.99
3
$ 17,820
1/(1+0.12)^3
0.71178
$ 12,683.92
4
$ 17,820
1/(1+0.12)^4
0.63552
$ 11,324.93
5
$ 17,820
1/(1+0.12)^5
0.56743
$ 10,111.55
-7.94%
NPV
$ (50,762.89)
Using Excel, we can find IRR as:
A
B
1
Year
Cash Flow
2
0
$ (115,000)
3
1
$ 17,820
4
2
$ 17,820
5
3
$ 17,820
6
4
$ 17,820
7
5
$ 17,820
8
-7.94%
To calculate IRR Formula for cell B8 “= IRR(B2:B7)”
As NPV and IRR both are negative, project should not be accepted.
Annual sales
$ 75,000
Less: Annual cost
$ 57,000
Less: Depreciation
$ 17,400
EBIT
$ 600
Less: Tax (@30%)
$ 180
Add: Depreciation
$ 17,400
Net annual Profit
$ 17,820
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