Aussie Home Entertainment Pty Ltd is setting up a new franchised store in an out
ID: 2819840 • Letter: A
Question
Aussie Home Entertainment Pty Ltd is setting up a new franchised store in an outer suburb of Sydney. This project has an initial requirement of $261 000 for fixed assets and $27 000 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78 000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96 200 and the discount rate is 13%. What is the project's net present value if the tax rate is 30%?
Explanation / Answer
Year
Cash flows = CF
Depreciation = D = 261000/4
Working capital adjustment = WC
Net cash flow* = (CF-D)x(1-Tax rate)+D+WC
Discount factor = Df = 1/(1+Interest)^Year
Present Values
0
-$261,000.00
$0.00
-$27,000.00
-$288,000.00
1.00
-$288,000.00
Y
CF
D
WC
NCF = (CF-D)x(1-30%)+D+WC
Df = 1/(1+13%)^Y
=Df x NCF
1
$96,200.00
$65,250.00
$86,915.00
0.884956
$76,915.93
2
$96,200.00
$65,250.00
$86,915.00
0.783147
$68,067.19
3
$96,200.00
$65,250.00
$86,915.00
0.693050
$60,236.45
4
$174,200.00
$65,250.00
$27,000.00
$168,515.00
0.613319
$103,353.41
Total = NPV =
$20,572.98
NPV = $20,572.98
Note:
Depreciation = Initial cost / Life of the project = 216000 / 4 = $65,250
Year 4 Cash flow = CF = Operating cash flow + Salvage value = 96200 + 78000 = $174,200.00
Year
Cash flows = CF
Depreciation = D = 261000/4
Working capital adjustment = WC
Net cash flow* = (CF-D)x(1-Tax rate)+D+WC
Discount factor = Df = 1/(1+Interest)^Year
Present Values
0
-$261,000.00
$0.00
-$27,000.00
-$288,000.00
1.00
-$288,000.00
Y
CF
D
WC
NCF = (CF-D)x(1-30%)+D+WC
Df = 1/(1+13%)^Y
=Df x NCF
1
$96,200.00
$65,250.00
$86,915.00
0.884956
$76,915.93
2
$96,200.00
$65,250.00
$86,915.00
0.783147
$68,067.19
3
$96,200.00
$65,250.00
$86,915.00
0.693050
$60,236.45
4
$174,200.00
$65,250.00
$27,000.00
$168,515.00
0.613319
$103,353.41
Total = NPV =
$20,572.98
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