Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $500,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $90,000 at the end of the project in 5 years. Sales would be $335,000 per year, with annual fixed costs of $62,000 and variable costs equal to 37 percent of sales. The project would require an investment of $55,000 in NWC that would be returned at the end of the project. The tax rate is 25 percent and the required return is 10 percent. Calculate the NPV of this project.

Question
Asked Nov 11, 2019
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Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $500,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $90,000 at the end of the project in 5 years. Sales would be $335,000 per year, with annual fixed costs of $62,000 and variable costs equal to 37 percent of sales. The project would require an investment of $55,000 in NWC that would be returned at the end of the project. The tax rate is 25 percent and the required return is 10 percent.

 

Calculate the NPV of this project. 

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Expert Answer

Step 1

The net present value is the true value of future cash flows. It is done by considering the time value of money at discounted rate.

Step 2

Given:

Initial cost of equipment= $500,000

Salvage value = $90,000

Annual sales = $335,000

Annual fixed cost = $62,000

Variable cost = 37% of sales

Project life = 5 years

Investment in NWC = $55,000

Tax rate = 25%

Required rate of return = 10%

Step 3

Calculations:

Firstly, calculate th...

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Calculations for net income after tax: Particulars Amount Calculations $335,000 $123,950 $62,000 $149,050 $37,262.5 $111,787.5 Annual sales 37% of $335,000 Less: Annual variable cost Less: Annual fixed cost Income tax before tax Less tax (25%) Net Income after tax

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