LOTUS INC This company is planning to invest in a project. The management accoun

Question

LOTUS INC This company is planning to invest in a project. The management accounting department received the following information Capex Depreciation Tax rate Project period Revenue Rent Salary Utilities Discount Rate Sale of asset @ end of project Interest expense Net working Capital Repairs expense $15000 $1500 15% 4 years $6000 500 2500 500 9% 4000 $1000 $5500 $900 REQUIRED a) Calculate the initial investment b) Calculate each year cash flow c) Calculate the terminal value of the asset used d) Calculate the NPV e) Find IRR

Explanation / Answer

Answer a Calculation of Initial Investment Capex $15,000.00 Net working Capital $5,500.00 Initial Investment $20,500.00 Answer b Calculation of each year cash flow Year 1 2 3 4 Revenue $6,000.00 $6,000.00 $6,000.00 $6,000.00 Depreciation -$1,500.00 -$1,500.00 -$1,500.00 -$1,500.00 Rent -$500.00 -$500.00 -$500.00 -$500.00 Salaries -$2,500.00 -$2,500.00 -$2,500.00 -$2,500.00 Utilities -$500.00 -$500.00 -$500.00 -$500.00 Interest expense -$1,000.00 -$1,000.00 -$1,000.00 -$1,000.00 Repairs expense -$900.00 -$900.00 -$900.00 -$900.00 Profit before Tax -$900.00 -$900.00 -$900.00 -$900.00 Tax @ 15% $135.00 $135.00 $135.00 $135.00 Depreciation $1,500.00 $1,500.00 $1,500.00 $1,500.00 Cash flow $735.00 $735.00 $735.00 $735.00 Answer c calculation of terminal value of the asset used Sale value of asset $4,000.00 Less : Book value at the end of 4th year $9,000.00 Loss on sale -$5,000.00 Tax shield on Loss @ 15% $750.00 Terminal value of the asset used $4,750.00 (Sale value + Tax shield) Answer d Calculation of NPV Year Cash flow Discount Factor @ 9% Present Value 0 -$20,500.00 1.000000 -$20,500.00 1 $735.00 0.917431 $674.31 2 $735.00 0.841680 $618.63 3 $735.00 0.772183 $567.55 4 $735.00 0.708425 $520.69 Terminal Value asset $4,750.00 0.708425 $3,365.02 Recovery of NWC $5,500.00 0.708425 $3,896.34 NPV -$10,857.45 Answer e Calculation of IRR Year Cash flow 0 -$20,500.00 1 $735.00 2 $735.00 3 $735.00 4 $10,985.00 IRR of the project = -11.23%

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