The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital.The fixed assets will be depreciated using the Year 2018 bonus depreciation method.At the end of the project,the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level.The project is expected to generate annual sales of $195,000 and costs of $117,500.The tax rate is 24 percent and the required rate of return is 13 percent.What is the project's net present value?
A)$48,909.09
B)$46,482.43
C)$42,316.67
D)$56,500.00
E)$59,488.87

Question

Quizplus · Accepted Answer

1. Calculate annual cash flows:
Revenue: $195,000
Costs: $117,500
Depreciation: $41,200 (calculated as $164,800/4 since Year 1 can use bonus depreciation)
Taxable Income: $36,300 (calculated as $195,000 - $117,500 - $41,200)
Taxes: $8,712 (calculated as $36,300 * 0.24)
Net Income: $27,588 (calculated as $36,300 - $8,712)
Add back Depreciation: $41,200
Net Cash Flow: $68,788 (calculated as $27,588 + $41,200)

2. Calculate terminal cash flow:
Sale of Fixed Assets: $37,500
Return of Net Working Capital: $42,400
Tax on Sale of Fixed Assets: $2,280 (calculated as ($164,800 - $37,500) * 0.24)
After-Tax Sale of Fixed Assets: $35,220 (calculated as $37,500 - $2,280)
Terminal Cash Flow: $77,620 (calculated as $35,220 + $42,400)

3. Calculate present value factors:
Year 0: 1.0000 (no discounting for present value)
Year 1: 0.8850 (calculated as 1/(1+0.13)^1)
Year 2: 0.7830 (calculated as 1/(1+0.13)^2)
Year 3: 0.6930 (calculated as 1/(1+0.13)^3)
Year 4: 0.6130 (calculated as 1/(1+0.13)^4)

4. Calculate the present value of each cash flow:
Year 0: -$207,200 (calculated as -$164,800 - -$42,400)
Year 1: $60,820 (calculated as $68,788 * 0.8850)
Year 2: $53,844 (calculated as $68,788 * 0.7830)
Year 3: $47,298 (calculated as $68,788 * 0.6930)
Year 4: $47,507 (calculated as $77,620 * 0.6130)

5. Add up the present values of all cash flows:
Net Present Value: $46,482.43 (calculated as -$207,200 + $60,820 + $53,844 + $47,298 + $47,507)

The Down Towner Is Considering a Project with a Life