Estimated annual sales: $540,0
Estimated annual sales: $540,000
Annual variable costs: $144,000
Estimated life: 3 years
Annual fixed costs: $60,000
Initial equipment cost (100% depreciated over 3-year life):$144,000
Initial investment in NWC (to be re-covered in year 3):$30,000
Tax rate: 25%
What is the firm’s annual Operating Cash Flow (OCF) for thisproject ($)?
What is the CFFA in year 3 ($)?Using the CFFA figures that youcalculated, what is the NPV for this project if the required returnis 11% ($)?
Answer:
| 1. Intial cash flow | ||||||||||||
| Equipment cost | 144000 | |||||||||||
| Investment in NWC | 30000 | |||||||||||
| 174000 | ||||||||||||
| 2. In between flows | ||||||||||||
| Sales | Variable cost | Fixed cost | Net income | Deprecition | CABT | Tax | CAT | Add: depreciation | Balance | Add: Working capitalrecapture | NET cash flow | |
| Year1 | 540000 | 144000 | 60000 | 336000 | 48000 | 288000 | 72000 | 216000 | 48000 | 264000 | 264000 | |
| Year2 | 540000 | 144000 | 60000 | 336000 | 48000 | 288000 | 72000 | 216000 | 48000 | 264000 | 264000 | |
| Year 3 | 540000 | 144000 | 60000 | 336000 | 48000 | 288000 | 72000 | 216000 | 48000 | 264000 | 30000 | 294000 |
| **Depreciation = 144000/3 | ||||||||||||
| 3. NPV | ||||||||||||
| CF | PVF | PVF x CF | ||||||||||
| Year 0 | -174000 | 1 | -174000 | |||||||||
| Year1 | 264000 | 0.9009 | 237837.6 | |||||||||
| Year2 | 264000 | 0.8116 | 214262.4 | |||||||||
| Year 3 | 294000 | 0.7311 | 214943.4 | |||||||||
| NPV | 493043.4 |
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