Aussie Home Entertainment Pty Ltd is setting up a new franchised store in an outer suburb of Sydney.This project has an initial requirement of $261 000 for fixed assets and $27 000 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78 000.All of the net working capital will be recouped at the end of the project.The annual operating cash flow is $96 200 and the discount rate is 13 per cent.What is the project's net present value if the tax rate is 30 per cent?

Question

Quizplus · Accepted Answer

Step 1: Calculate the initial investment:
Initial investment = Fixed assets + Initial NWC
Initial investment = $261,000 + $27,000
Initial investment = $288,000

Step 2: Calculate the annual after-tax cash flows:
Annual after-tax cash flows = Operating cash flow x (1 - tax rate)
Annual after-tax cash flows = $96,200 x (1 - 0.30)
Annual after-tax cash flows = $67,340

Step 3: Calculate the terminal cash flow:
Terminal cash flow = Salvage value + Recaptured NWC - Tax on salvage value
Terminal cash flow = $78,000 + $27,000 - (0.30 x ($78,000 - book value))
Terminal cash flow = $105,600

Step 4: Calculate the present value of each year's cash flow:
Year 1: $67,340 / (1 + 0.13)^1 = $59,548
Year 2: $67,340 / (1 + 0.13)^2 = $52,709
Year 3: $67,340 / (1 + 0.13)^3 = $46,420
Year 4: $67,340 + $105,600 / (1 + 0.13)^4 = $92,758

Step 5: Calculate the net present value:
NPV = sum of present values - initial investment
NPV = $59,548 + $52,709 + $46,420 + $92,758 - $288,000
NPV = $48,191

Therefore, the best choice is C, with a net present value of $48,191.

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