To calculate the net present value (NPV) of the project, we need to discount the cash flows to present value and then subtract the initial investment.
To find the present value of the net annual operating cash inflow, we can use the formula:
PV = CF / (1 + r)^n
Where PV is the present value, CF is the cash flow, r is the after-tax discount rate, and n is the number of years.
In this case, the net annual operating cash inflow is $220,000, the after-tax discount rate is 12%, and the project has a 3-year life.
Calculating the present value of the net annual operating cash inflow:
PV = $220,000 / (1 + 0.12)^3
PV = $220,000 / 1.404928
PV = $156,769.23
Next, we need to calculate the depreciation expense each year:
Depreciation expense = $150,000
The tax savings from the depreciation expense can be calculated as:
Tax savings = depreciation expense * tax rate
Tax savings = $150,000 * 0.30
Tax savings = $45,000
Now, we can calculate the after-tax cash flow each year:
Year 1:
After-tax cash flow = net operating cash inflow + tax savings
After-tax cash flow = $220,000 + $45,000
After-tax cash flow = $265,000
Year 2:
After-tax cash flow = net operating cash inflow + tax savings
After-tax cash flow = $220,000 + $45,000
After-tax cash flow = $265,000
Year 3:
After-tax cash flow = net operating cash inflow + tax savings
After-tax cash flow = $220,000 + $45,000
After-tax cash flow = $265,000
Now, we can calculate the net present value:
NPV = sum of present value of cash flows - initial investment
NPV = ($156,769.23 * 1) + ($156,769.23 * 1) + ($156,769.23 * 1) - $450,000
NPV = $470,307.69 - $450,000
NPV = $20,307.69
Therefore, the net present value of the project is $20,307.69.
Brodigan Corporation has provided the following information concerning a capital budgeting project. The expected life of the project and the equipment is three years, and the equipment has zero salvage value. The company uses straight-line depreciation on all equipment, and the depreciation expense on the equipment would be $150,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.
What is the net present value of the project?
Investment required in equipment: $450,000
Net annual operating cash inflow: $220,000
Tax rate: 30%
After-tax discount rate:12%
1 answer
1 answer