Provide the solution by using Excel with formula view also \"Rough & Ready Const

Question

Provide the solution by using Excel with formula view also

"Rough & Ready Constructions Pty Ltd" in Perth is considering some new equipment. This new equipment will generate new sales revenue. No existing equipment will be replaced. The new equipment has a 3-year life for depreciation purposes under Australian tax regulations and would be fully depreciated by the prime cost method over those years. It is planned to close down the project at the end of Year 3. The company will need to increase its net operating working capital at the beginning of the project but no further increases are foreseen. Revenues and other operating costs are expected to be constant over the project's life Data concerning the project is tabled below Required return for projects of this risk level New investment in fixed capital Additions to inventories at outset of project Additions to trade accounts receivable at outset of project Additions to trade accounts payable at outset of project Incremental sales revenue of the firm Incremental cash operating costs of the firm Expected pre-tax salvage proceeds Company tax rate 12% $240,000 $22,000 $14,000 $18,500 $200,000 p.a $75,000 p.a $50,000 30% Required (a) What is the project's NPV? (13 marks) (b) With appropriate justification, briefly explain whether the company should undertake the project or not (2 marks)

Explanation / Answer

investment in fixed assets

-240000

addition in net working capital = (increase in accounts receivables +increase in inventories-increase in accounts payable

(-22000-14000+18500)

-17500

total initial investment

-257500

incremental sale

200000

less incremental expense

75000

incremental cash flow

125000

less annual depreciation

240000/3

80000

cash flow after depreciation

45000

les tax-30%

13500

after tax cash flow

58500

add depreciation

80000

operating cash flow

138500

Year

incremental cash flow

present value of incremental cash flow = cash flow/(1+r)^n r = 12%

0

-257500

-257500

-257500

1

138500

138500/(1.12)^1

123660.7

2

138500

138500/(1.12)^3

110411.4

3

173500

173500/(1.12)^3

123493.9

NPV

sum of present value of cash flow

100065.9

Year 3 cash flow

annual operating cash flow +(scrap value*(1-tax rate))

138500+(50000*(1-.3))

173500

Company should untertake the project as NPV is positive and value of 100065.9 added over the investment

investment in fixed assets

-240000

addition in net working capital = (increase in accounts receivables +increase in inventories-increase in accounts payable

(-22000-14000+18500)

-17500

total initial investment

-257500

incremental sale

200000

less incremental expense

75000

incremental cash flow

125000

less annual depreciation

240000/3

80000

cash flow after depreciation

45000

les tax-30%

13500

after tax cash flow

58500

add depreciation

80000

operating cash flow

138500

Year

incremental cash flow

present value of incremental cash flow = cash flow/(1+r)^n r = 12%

0

-257500

-257500

-257500

1

138500

138500/(1.12)^1

123660.7

2

138500

138500/(1.12)^3

110411.4

3

173500

173500/(1.12)^3

123493.9

NPV

sum of present value of cash flow

100065.9

Year 3 cash flow

annual operating cash flow +(scrap value*(1-tax rate))

138500+(50000*(1-.3))

173500

Company should untertake the project as NPV is positive and value of 100065.9 added over the investment

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