Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The equipment can be sold for $220,000 after the four years.The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project.The projected operating cash flow is $211,500 a year.What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is -$7,632.77. The project requires an initial investment of $708,000 for equipment and $46,000 for net working capital, for a total of $754,000. The project will generate operating cash flows of $211,500 per year for four years, and the equipment can be sold for $220,000 at the end of the project. The project's after-tax salvage value is $220,000 * (1 - 0.34) = $145,600. The project's net present value is calculated as follows:```NPV = -Initial investment + Present value of operating cash flows + Present value of salvage valueNPV = -$754,000 + $211,500 * (1 - 1 / (1 + 0.13)^4) / 0.13 + $145,600 / (1 + 0.13)^4NPV = -$754,000 + $634,522.73 + $93,254.34NPV = -$7,632.77```

Lakeside Winery Is Considering Expanding Its Winemaking Operations