Finance: Net Present Value Analysis and Cash Flow from Operations
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Added on  2023/04/25
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This document provides a detailed analysis of net present value and cash flow from operations for a finance project. It includes information on depreciation, working capital, salvage value, and operating cash flows.
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Running head: FINANCE Finance Name of the Student: Name of the University: Author’s Note:
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1FINANCE Table of Contents Question 1..................................................................................................................................2 Question 2..................................................................................................................................3 References..................................................................................................................................6
2FINANCE Question 1 1) The depreciation for the project was calculated for the equipment by using the straight line depreciation method where the equipment initial value was divided using the straight line method. The depreciation value was around 55,333 (200,000-34,000/3). 2) The after tax salvage value of the equipment was considered after taking the tax rate of 34% and the same has been taken into consideration. The salvage value is 34,000 and after tax salvage value is 22,440 (34000*(1-0.34)). 3) The net change in the working capital is around zero as the initial invested working capital is expected to be recovered in the third year of the project. Initial investment of 50,000 will not be recovered in the form of recovery of working capital as 50,000(Alleyne, Armstrong and Chandler 2018). 4) The Time Zero- Cash Flow from Assets is around 250,000, which will be in the formof purchase of equipment (200,000) and working capital investment (50,000). 5) The estimated operating cash flow that the project must generate to make NPV to zero is: 6)a) The NPV of project is -$628,460 b) IRR of Project will be the required rate of return from the project that is 15%. c) Profitability Index is 1 as the cash inflow is equal to the cash outflow for the company. d) Financial Breakeven for the company can be well done with the help of operations of the company where the company will be producing two next parks for a year, which will be a financial breakeven position for the company.
3FINANCE Net Present Value Analysis ParticularsYear 0Year 1Year 2Year 3 Initial Investment - 200,000 Working Capital Investment-50,000 Initial Investment - 250,000 Depreciation-55333-55333-55333 Fixed Costs-16000-16000-16000 Variable Costs-336000-336000-336000 Total Costs-407333-407333-407333 Less: Tax Shield for expenses 138493. 3 138493. 3 138493. 3 Net Cost after tax-268840-268840-268840 Add: Depreciation553335533355333 Net Operating Cash Flow-213507-213507-213507 Salvage Value34000 Less: Tax on Sale-11560 Net Salvage Value22440 Net Cash Flows - 250,000-213,507-213,507-191,067 Net Present Value-628460 Question 2 1) The $5000 Spent by AAA in investigating the financial viability of the new machine will be treated as Sunk Cost. The same will not be taken into consideration while evaluating the financial viability or the profitability of the project(Shivaani, Jain and Yadav 2017). 2) The change in the networking capital for the company would be in the form of additional initial inventory of $20,000 and the additional increase in the inventory by around $3,000 for a sum of three years will be the key increase in the working capital of the company. The net total change in the working capital of the company would be around $29,000
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4FINANCE 3) The depreciation of the machine at year 2 will be around $88,900 4) Depreciation Tax Shield at the year 3 will be around $23,870. 5) The book value of the machine at the end of the third year will be $148,200 but after considering the salvage value of the machine the equipment cost will be around $68,200, which has been derived by (148200-80000). 6) The after tax salvage value at the end of the project at the end of year 3 will be around $56,130 which has been derived by deducting the net book value of the asset with the applicable tax rate of 35%. (68,200-23,870) = $56,130. 7) The operating cash flows for the project would be as follows: ParticularsYear 0Year 1Year 2Year 3 Initial Investment (2,000,0 00) Working Capital Investment (Inventory) (20,0 00) Initial Investment (2,020,0 00) Cash Flows800,000800,000800,000 Depreciation (666,6 00) (889,0 00) (296,20 0) Increase in Inventory (3,0 00) (3,0 00) (3,0 00) Total Costs (669,6 00) (892,0 00) (299,20 0) Less: Tax Shield for expenses 234,3 60 312,2 00 104,7 20 Net Cost after tax (435,2 40) (579,8 00) (194,48 0) Add: Depreciation 666,6 00 889,0 00 296,2 00 Net Operating Cash Flow 1,031,3 60 1,109,2 00 901,7 20 Book Value148200
5FINANCE Salvage Value80,000 Net Remaining Value68,200 Less: Tax on Sale23870 Net Salvage Value56,130 Net Cash Flows-2,020,000 1,031,3 60 1,109,2 00 957,8 50 Net Present Value$337,471 The operating cash flows for the company are: ParticularsYear 0Year 1Year 2Year 3 Net Operating Cash Flow 1,031,3 60 1,109,2 00 901,7 20 8) The Cash flow from Operation are as follows: ParticularsYear 0Year 1Year 2Year 3 Net Cash Flows-2,020,000 1,031,3 60 1,109,2 00 957,8 50 Net Present Value$337,471 9) The project should be accepted as the net present value of the project is around $ 337,471 which states that the project would be creating wealth for the shareholders or stakeholders of the company in the form of profitability from the project. The calculation of NPV has taken 15% as the discount rate for determining the financial viability of the business(Su et al. 2018).
6FINANCE References Alleyne, P., Armstrong, S. and Chandler, M., 2018. A survey of capital budgeting practices used by firms in Barbados.Journal of Financial Reporting and Accounting,16(4), pp.564- 584. Shivaani, M.V., Jain, P.K. and Yadav, S.S., 2017. Perceptual Mapping of Capital Budgeting Techniques: Empirical Evidence from Corporate Enterprises in India.Research Bulletin, 42(4), pp.106-112. Su, S.H., Lee, H.L., Chou, J.J., Yeh, J.Y. and Thi, M.H.V., 2018. Application and effects of capital budgeting among the manufacturing companies in Vietnam.International Journal of Organizational Innovation (Online),10(4), pp.111-120.