XYZ Corporation is considering an expansion project. To date they have spent $62
ID: 2800615 • Letter: X
Question
XYZ Corporation is considering an expansion project. To date they have spent $62,600 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $17,800 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $51,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $600,000.00. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33.33%, 44.45%, 14.81%, and 7.41%.
If the project is undertaken the company will need to increase its inventories by $30,800, and its accounts payable will rise by $7,900. The company will realize an additional $560,450.00 in sales over each of the next three years. The company’s operating costs (not including depreciation) will increase by $282,886.00 a year. Both sales and the operating cost are expected to grow 6.50% annually during the life of the project. The company’s tax rate is 35.00%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $95,500.00 after three years. The project’s WACC is 16.25%. What is the project’s net present value (NPV)?
The correct answer is ($17,806.21). PLEASE SHOW WORK AND FORMULAS ON HOW YOU GOT ANSWER!! THANK YOU!!
Explanation / Answer
NWC = -30,800 + 7,900 = -22,900
Sales and Costs increases by 6.5%
Depreciation = MACRS % x Investment
Cash Flows = Net Income + Depreciation + Investment + NWC + After-tax Salvage Value
After-tax Salvage Value = (Salvage - Book Value) x (1 - tax rate) + Salvage
= (95,500 - 44,460) x (-35%) + 95,500
= 77,636
NPV can be calculated using NPV function on a calculator or excel with 16.25% as discount rate.
XYZ 0 1 2 3 4 MACRS 33.33% 44.45% 14.81% 7.41% Investment -$ 600,000.00 $ 44,460.00 NWC -$ 22,900.00 $ 22,900.00 Salvage $ 95,500.00 Sales $ 560,450.00 $ 596,879.25 $ 635,676.40 Costs -$282,886.00 -$ 301,273.59 -$320,856.37 Depreciation -$199,980.00 -$ 266,700.00 -$ 88,860.00 EBT $ 77,584.00 $ 28,905.66 $ 225,960.03 Tax (35%) -$ 27,154.40 -$ 10,116.98 -$ 79,086.01 Profits $ 50,429.60 $ 18,788.68 $ 146,874.02 Cash Flows -$ 622,900.00 $ 250,409.60 $ 285,488.68 $ 336,270.02 NPV $17,806.21Related Questions
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