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A firm has undertaken a feasibility study to evaluate a project that has the following estimated cashflows:
1.
A firm has undertaken a feasibility study to evaluate a project that has the following estimated cashflows:
- Increased sales to business of $160,000 for the next four years (starting in one year's time)
- Increased costs of $40,000 for the next two years (starting in one year's time)
- The initial capital expenditure required is $400,000.
- The feasibility study cost $8,000 to conduct.
- Amount borrowed to fund project is $280,000 with interest of 7.5% p.a. paid yearly.
If the firm is facing a discount rate of 10%, what is the NPV of this project?
2.
Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income (EBITDA) by $15,000 each year for the next 4 years. It costs $35,000 to purchase today and for tax purposes must be depreciated down to zero over its 5 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $9,000 after 4 years, what is the machine's net cash flow (after tax) for year 4? Assume the tax rate is 30%.
NB: EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortisation"
