Simple NPV

but I just can’t get their answer. Project is as follows: Costs $8000 plus $2000 in shipping and installation For the next five years the project annually generates $5,000 in sales and $2,000 in costs, excluding depreciation The project is being depreciated on Str-line basis over 5 years with no salvage value Co tax rate is 40%, WACC is 10% So I would have thought that each yearly cash flow is 5000 sales - 2000 costs - 2000 depreciation = 1 000 EBIT - 400 tax = 600 after tax cash flow But it must be wrong as the answer is -$144

I mean the NPV is -$144

To get cash flow you need to add back depreciation (a non-cash expense) to get cash flow of 2,600 per year for 5 years. With initial cost of 10,000 you should get the NPV of (144).

you’re absolutely right, thanks for that

Im really confused on this one. How do you get 2600 for total cash flow. Thanks.

Remember from FSA, cash flow…you start from NET income…and add back the non cash expenses.

Annual sales: 5,000 Costs: 2,000 Depreciation:2,000 (initial cost of the project: 8,000+2,000=10,000, depreciated straight line over a 5 year period, that is a 2,000 depreciation charge each year) EBT=5,000-2,000-2,000 = 1,000 Taxes: 40%*1,000 = 400, that is a NI of 600 Depreciation is a non-cash expense, so add it back to NI to determine the cash-flow of the project, 600+2,000 = 2,600 Use the CF function of the calculator: CF0=-10,000 CF1=2,600, F1=5 Hit NPV, with an I of 10%, that gives the NPV=-144

Ah ok. Thx

the cost of project is 8000 + 2000 (one time charges) 2000 is a cash expense at time t=0 Why dont we depreciate 8000(instead of 10000) over 5 yrs? the cash flow for each year is 2440, and -732 NPV Not knowing that correct answer is -144, I would have chosen this approach

bk Wrote: ------------------------------------------------------- > > Why dont we depreciate 8000(instead of 10000) over > 5 yrs? > Because the book value of the asset includes all costs associated with having the asset working (that includes shipping and installation).