Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires aninitial investment of $16.7 million that will be depreciated straight-line to zero over theproject’s life. An initial investment in net working capital of $1,070,000 is required tosupport spare parts inventory; this cost is fully recoverable whenever the project ends.The company believes it can generate $14.3 million in revenues with $5.8 million inoperating costs. The tax rate is 22 percent and the discount rate is 14 percent. Themarket value of the equipment over the life of the project is as follows:Year Market Value ($ millions)1 $ 14.702 11.703 9.204 1.95a. Assuming Hand Clapper operates this project for four years, what is the NPV?b. Compute the project NPV assuming the project is abandoned after only one year.c. Compute the project NPV assuming the project is abandoned after only two years.d. Compute the project NPV assuming the project is abandoned after only threeyears.

Question
Asked Oct 30, 2019
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Consider the following project for Hand Clapper, Inc. The company is considering a 4-
year project to manufacture clap-command garage door openers. This project requires an
initial investment of $16.7 million that will be depreciated straight-line to zero over the
project’s life. An initial investment in net working capital of $1,070,000 is required to
support spare parts inventory; this cost is fully recoverable whenever the project ends.
The company believes it can generate $14.3 million in revenues with $5.8 million in
operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The
market value of the equipment over the life of the project is as follows:

Year Market Value ($ millions)
1 $ 14.70
2 11.70
3 9.20
4 1.95
a. Assuming Hand Clapper operates this project for four years, what is the NPV?
b. Compute the project NPV assuming the project is abandoned after only one year.
c. Compute the project NPV assuming the project is abandoned after only two years.
d. Compute the project NPV assuming the project is abandoned after only three
years.

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Expert Answer

Step 1

As per the rule, I will answer first three parts of the question. Please post again for the last part to be answered, mention the same in the question.

To calculate the NPV of the project, first depreciation is calculated using straight-line method, then income statement and cash flow of the company is prepared.

Please refer to the whiteboard for calculations

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A В C. 1 2 Inputs 3 Initial Investment 4 Net Working Capital 5 Revenue Operating cost 7 Tax 16700000 1070000 14300000 5800000 22% 8 discount rate 14%

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Step 2
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A В Cc Е F Depreciation using straightline method 10 11 Depreciation Book value Market Value 16700000 12525000 12 Year 13 0 14700000 14 1 4175000 4175000 11700000 15 2 8350000 4175000 16 3 4175000 9200000 17 4175000 0 1950000 18 19 Income Statement Year 2 Year 1 Year 3 Year 4 20 21 Revenue 14300000 14300000 14300000 14300000 5800000 22 Operating Cost 5800000 5800000 5800000 4175000 4175000 23 Depreciation 4175000 4175000 24 25 Earning Before Tax 4325000 4325000 4325000 4325000 951500 26 Таx 951500 951500 951500 27 Net Income 3373500 3373500 3373500 3373500

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Step 3

Calculation of Gain on Sale of Asset at the end of 4 years and Cash flow statement...

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A В Е Gain On Sale of Asset after 4 years Cash Flow Statement Market Value Book Value Gain Tax on Gain After Tax salvage value 31 1950000 Year 0 Year 1 Year 2 Year 4 3373500 3373500 4175000 4175000 Year 3 32 3373500 33 Net Income 34 Add Depreciation 3373500 1950000 4175000 4175000 429000 35 1521000 36 Cash Flow from Operating activities 7548500 7548500 7548500 7548500 37 38 Initial Investment 39 Initial Net working Ca -16700000 1070000 -1070000 40 41 Terminal Cash flow 42 Gain on Sale of Asset 1521000 43 44 Cash Flow 7548500 7548500 10139500 -17770000 7548500 45 46 47 PV factor @ 14% 48 PV of Cash flows 49 NPV 0.877192982 0.76946753 0.6749715 16 0.59208 5095022.49 6003398 -17770000 6621491.228 5808325.64 5758237.33

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