Lakeside Winery is considering expanding its winemaking operations. The expansio
ID: 2827140 • Letter: L
Question
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $665,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $176,000 at the end of the project. The project requires $46,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $151,600 a year. What is the net present value of this project if the relevant discount rate is 12 percent and the tax rate is 40 percent?
?$10,905
?$12,925
?$9,815
–$11,632
?$13,919
Explanation / Answer
?$10,905
Working:
Net Present Value is calculated as follows: Year 0 1 2 3 4 5 6 Total Operating cash flow $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 1,51,600 Investment in new fixed assets $ -6,65,000 Investment in net working capital $ -46,000 Release of net working capital $ 46,000 After tax sael of equipment $ 1,05,600 Total cash flow $ -7,11,000 $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 1,51,600 $ 3,03,200 Discount factor @ 12% 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 Present Value $ -7,11,000 $ 1,35,357 $ 1,20,855 $ 1,07,906 $ 96,345 $ 86,022 $ 1,53,611 $ -10,905 Working; After tax sale proceeds = $ 1,76,000 x (1-0.40) = $ 1,05,600Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.