Western Tech is considering a new project that will require $118,000 of fixed assets and net working capital of $16,000.The fixed assets will be depreciated on a straight-line basis to a zero salvage value over three years.Ignore bonus depreciation.This project is expected to produce an operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually for two years before the project is shut down.The fixed assets can be sold for $55,000 at the end of the project and all net working capital will be recovered.What is the net present value of this project at a discount rate of 11.5 percent and a tax rate of 23 percent?
A)$3,209.17
B)$15,311.09
C)$12,136.54
D)−$3,770.30
E)−$5,456.32

Question

Quizplus · Accepted Answer

To find the net present value (NPV) of the project, we need to calculate the cash flows and discount them to the present value using the given discount rate of 11.5%.

The cash flows for this project are as follows:

Year 0: -$134,000 (initial investment of $118,000 in fixed assets + $16,000 in net working capital)
Year 1: $45,000
Year 2: $42,750 ($45,000 * (1 - 0.05))
Year 3: $40,613 ($42,750 * (1 - 0.05))
Year 4: $76,897 (proceeds from selling fixed assets for $55,000 + $16,000 in net working capital recovery)

To calculate the present value of these cash flows, we use the formula:

PV = CF / (1 + r)^t

Where PV is the present value, CF is the cash flow, r is the discount rate, and t is the time period.

Using this formula, we get the following present values for each cash flow:

Year 0: -$134,000 / (1 + 0.115)^0 = -$134,000
Year 1: $45,000 / (1 + 0.115)^1 = $40,180.45
Year 2: $42,750 / (1 + 0.115)^2 = $34,315.45
Year 3: $40,613 / (1 + 0.115)^3 = $28,074.22
Year 4: $76,897 / (1 + 0.115)^4 = $48,507.42

Finally, we sum up these present values to get the NPV of the project:

NPV = -$134,000 + $40,180.45 + $34,315.45 + $28,074.22 + $48,507.42 = $12,136.54

Since the NPV is positive, the project is expected to generate a return higher than the discount rate, and should be accepted. Therefore, the best choice is C.

Western Tech Is Considering a New Project That Will Require