Need the NPV for a proposed business expansion project with the
following financial data.
- 50,000 for new equipment (depreciated over 3-year MACRS)
- no salvage value, and no additional income after 4 years.
- 5,000 increase in net working capital. (this will be recovered at
the end of four years)
- operating cost are 60% of annual sales.
- projected increases in sales
Year 1 - 30,000 Year 2 - 35,000 Year 3 - 45,000 Year 4 - 40,000
- 40% tax rate
- 10% WACC.
- a rental property will be used for the expansion, this property is
an existing asset of the business, they currently lease it out for
$3,000/y (before tax) (being paid at the end of the year). This
rental income will no longer be coming in if the proposed expansion is
undertaken.
An explanation of the steps used to solve would be appreciated. Business Spectator - Universal Resources lifts Roseby NPV to $282m::
Mar 10, 2008 Latest Business & Finance News Online & Updated Daily at Business based on a throughput of 4 million tpa, without expansion to 8 Mtpa.
http://www.businessspectator.com.au/bs.nsf/Article/Universal-Resources-lifts-Roseby-NPV-to-282m-CKVH6?OpenDocumentHOME |
Year 0 Year 1 Year 2 Year 3 Year 4
Depre% (3 Yrs Macrs) 33.33 44.45 14.81 7.41
sales a 30000 35000 45000 40000
Cost @ 60% b -18000 -21000 -27000 -24000
depre -16665 -22225 -7405 -3705
Nprof -4665 -8225 10595 12295
Tax c 1866 3290 -4238 -4918
Net Cash inflow a+b+c 13866 17290 13762 11082
Less Lease (3000 *60%) -1800 -1800 -1800 -1800
Net cash inflow 12066 15490 11962 9282
PV Factor 0.909 0.826 0.751 0.683
PV of cash flow 10,969 12,802 8,987 6,340
Total PV of inflow 39,098
Work Cap -5,000
Equipment -50,000
PV of W Cap recov 3,415 (5,000 * 0.683 PV factor for Year 4)
Total -12,487
Hence the NPV of the project = - 12,487
NPV is 10% per year compounded annually.
So in Year one PV is = 1/1.10 = 0.909
Year 2 = 1/1.10*1.10 = 0.82
etc etc
In other words if you have 0.82 today and invested @ 10% per year you
will get $1 at the end of year 2 = 0.82 * 1.1 * 1.1 = 1
I will answer your question about the present value factor if you will
allow me to present it as the official answer to the question.
Is that OK?
Sincerely,
Wonko
Can you explain why the PV Factor is changed from year to year? I
thought that it would be 10% across the board?
Thanks
I will allow nh786 the opportunity to respond. If I do not hear back
by tomorrow morning I will get back with you.
Thanks
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NPV - business expansion