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Ee Assignment Lu 6

The Movie Place is considering a new investment project with a net investment of $65,000 and additional working capital of $10,000. Revenues are expected to be $70,000 annually for 3 years with operating costs of $25,000. Equipment will be depreciated by 33.33% annually and have a salvage value of $5,000 at the end of 3 years. The project's NPV is $26,553.97.

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106 views6 pages

Ee Assignment Lu 6

The Movie Place is considering a new investment project with a net investment of $65,000 and additional working capital of $10,000. Revenues are expected to be $70,000 annually for 3 years with operating costs of $25,000. Equipment will be depreciated by 33.33% annually and have a salvage value of $5,000 at the end of 3 years. The project's NPV is $26,553.97.

Uploaded by

NethiyaaRajendran
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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QUESTION 1

Swannee Resorts is considering a new project whose data are shown below. The equipment that would be
a 3-year tax life, would be depreciated by the straight line method over the project's 3 year life, and would
salvage value. No new working capital would be required. Revenues and other operating costs are expecte
constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-

WACC 10%
Net investment cost (depreciable basis) $65,000
Straight line depr’n rate 33.33%
Sales revenues $70,000
Operating costs excl. depr’n $25,000
Tax rate 35%

INVESTMENT AMOUNT 65,000

YEAR 0 1 2 3
EUIPMENT COST 70,000 70,000 70,000

OPERATING COST 25,000 25,000 25,000

DEPRECIATION COST 21666.67 21666.67 21666.67

-EBIT 23,333 23,333 23,333

EBIT AFTER TAX 8167 8167 8167

-DEPRECIATION COST 15,167 15,167 15,167


OPERATING CASH
36,833 36,833 36,833
FLOW
NPV 26,599.05
e used has
have zero
ed to be
-3.)
QUESTION 2
Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would
has a 3-year tax life, would be depreciated by the straight line method over the project's 3-year life, would
salvage value, and no new working capital would be required. Revenues and other operating costs are expe
constant over the project's 3-year life. However, this project would compete with other Yummy products a
reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years

WACC 10%

Annual pre-tax cannibalization cost $5,000


Net investment cost (depreciable
$65,000
basis)
Straight line depr’n rate 33.33%

Sales revenues $70,000

Operating costs excl. depr’n $25,000

Tax rate 35%

INVESTMENT 65000
YEAR 0 1 2 3

EQUIPMENT COST 70,000 70,000 70,000


-OPERATING COST 25,000 25,000 25,000
-CANNIBLIZATION COST 5,000 5,000 5,000
-DEPRECIATION 21666.67 21666.67 21666.67

EBIT 18,333 18,333 18,333


-AFTER TAX 6416.667 6416.667 6416.667

AFTER TAX EBIT - DEPRECIATION 11,917 11,917 11,917


+DEPRECIATION 21666.67 21666.67 21666.67
OPERATING CASH FLOW 33,583 33,583 33,583

NPV 18516.78
d be used
have zero
ected to be
and would
1-3.)
QUESTION 3
The Movie Place is considering a new investment whose data are shown below. The required equipm
would be fully depreciated by the straight line method over the 3 years, but it would have a positive sa
when the project would be closed down. Also, some new working capital would be required, but it wo
the project's life. Revenues and other operating costs are expected to be constant over the project's 3
NPV?

WACC 10%
Net investment cost
$65,000
(depreciable basis)
Required new working capital $10,000

Straight line depr’n rate 33.33%

Sales revenues $70,000

Operating costs excl. depr’n $25,000

Expected pretax salvage value $5,000

Tax rate 35%

initial investment 65,000


new working capital
10,000

operating cash flow


year 0 1 2 3
revenue 70,000 70,000 70,000
- operating cost 25,000 25,000 25,000
-depreciation 21667 21666.6667 21666.6667
Earnings before tax 23,333 23,333 23,333
-taxes 8166.66667 8166.66667 8166.66667
Earning after taxes 15,167 15,167 15,167
+depreciation 21667 21667 21667
operating cash flow -75,000 36,833 36,833 36,833

terminal cash flow


Recovery of capital value 10,000
salvage value 5,000
*tax 35% 1750

NPV ANALYSIS -75,000 36,833 36,833 50,083


NPV 26553.97
ent has a 3-year tax life and
alvage value at the end of Year 3,
ould be recovered at the end of
3-year life. What is the project's

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