Consider the following project being evaluated by your company:
Initial price of the asset is $230,000 will require $20,000 transportation and $5,000 installation.
Will be depreciated S/L over 6 years to zero salvage.
Market value for the asset at end of 5 years is expected to be $50,000 (the asset will be operated for only 5 years)
Net investment in NWC in year 0 (at the initial period) of $30,000
Sales, first year, expected to be generated by the project $100,000
Annual cost of goods sold 60% of sales
Annual sales growth rate 4%
Marginal tax rate 30%
Cost of capital 10%
Calculate the depreciable base for the asset.
Calculate the project’s cash outflow in year 0 (Initial outlay)
Calculate Annual operating cash flows for year 1-5 (OCF)
Calculate the asset’s after tax salvage in year 5.
Calculate the project’s internal rate of return (IRR)
Check points:
NI in year 2 = (630) loss
NPV = (74,265.51)