Angel Inc. is considering a new investment project and has gathered the following

relevant information:

The new equipment for this project will cost $1.65 million dollars. It will be

sold at the end of the project for $0.5 million.

The equipment belongs to the 3 Year Asset Class under MACRS and the

depreciation rates are as follows:

i. Year 1: 33.33%

ii. Year 2: 44.45%

iii. Year 3: 14.81%

iv. Year 4: 7.41%

The project will involve an increase in net working capital of $250,000 in the

beginning, which can be recovered at the end of the project.

The project will last for 2 years. In each year, the revenue is estimated to be

$6 million and production costs will be 45% of revenue. In addition, there

will be a fixed cost of $90,000 each year.

Angel Inc.'s tax rate is 30%.

Angel Inc.'s WACC is 12%.

Q1. Calculate the nonoperating cash flow of Year 2 generated by the sale of the

equipment and recovery of working capital. (3 Points)

Answer: Accumulated Depreciation = (0.3333+0.4445)*1,650,000 = $1,283,370.00

Book Value = $1,650,000 - $1,283,370.00 = $366,630.00

Selling Price = $500,000

Gain on disposal of equipment = $500,000 $366,630.00 = $133,370.00

Tax = 0.3 x $133,370.00 = $40,011.00

Cash Flow from Disposal = $500,000 $40,011.00 = $459,989.00

Recovery of Net Working Capital = $250,000.00

Non-Operating Cash Flow of Year 2 = $459,989.00 + $250,000.00 = $709,989.00

Q2. Should Angel Inc. invest in this project? Explain your answer. (2 Points)

Answer: NPV = 1,900,000.00 + (2,411,983.50)/(1.12) + (3,177,016.50)/(1.12)^2 =2,786,255.64

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From Q1, could you explain to me why net working capital is a non-operating cash flow.

From Q2, could you explain to me where is the number 3,177,016.50 came from?