Calculate the NPV for the Following Capital Budgeting Proposal: $100,000

question 15

Essay

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over five years to an expected salvage value of $5,000, 35 percent tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, 11 percent cost of capital.
$\begin{array}{|l|r|r|r|r|r|r|}\hline & {\text { Year 0 }} & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\\hline \text { Cost } & -100,000 & & & & & \\\hline \text { Change in Working } & -8,000 & & & & & 8,000 \\\hline \text { Capital } & & & & & & \\\hline \text { Revenues } & 45,000 & 45,000 & 45,000 & 45,000 & 45,000 & \\\hline \text { - Expenses } & -15,000 & -15,000 & -15,000 & -15,000 & -15,000 & \\\hline \text { - Dep } & & -19,000 & -19,000 & -19,000 & -19,000 & -19,000 \\\hline \text { = Pretax Profit } & & 11,000 & 11,000 & 11,000 & 11,000 & 11,000 \\\hline \text { Taxes } & & 3,850 & 3,850 & 3,850 & 3,850 & 3,850 \\\hline \text { Profit } & & 7,150 & 7,150 & 7,150 & 7,150 & 7,150 \\\hline \text { Salvage Value } & & & & & & 5,000 \\\hline \text { Tax effect } & & & & & 0 & 5,000 \\\hline \text { Cash Flows } & -108,000 & 26,150 & 26,150 & 26,150 & 26,150 & 39,150\\\hline\end{array}$

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Definitions:

Market Exposure

The degree to which an investment or portfolio is exposed to market risk.

Securities Act of 1933

A U.S. federal law aimed at ensuring transparency and fairness in the securities market by requiring companies to disclose relevant financial information.

Investment Company Act of 1940

US federal legislation that regulates the organization of investment companies and the activities they engage in.

NAV (Net Asset Value)

The per-share value of a mutual fund or ETF, calculated by dividing the total value of all the securities in its portfolio, minus liabilities, by the number of shares outstanding.