Cash Flow Estimation Salvage Value:
XYZ Corporation is considering an expansion project. To date they have spent $62,600 investigating
the viability of the project and have decided to proceed. The CEO of XYZ spent $17,800 last year on
his business trip to New York where he discussed about the proposed new project with the board
members. The company spent $51,000 on a marketing study before its current analysis regarding
whether to accept or reject the project. The proposed project will cost $600,000.00. The project will be
depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate
the machine and equipment which are 33.33%, 44.45%, 14.81%, and 7.41%.
If the project is undertaken the company will need to increase its inventories by $30,800, and its
accounts payable will rise by $7,900. The company will realize an additional $560,450.00 in sales over
each of the next three years. The companys operating costs (not including depreciation) will increase
by $282,886.00 a year. Both sales and the operating cost are expected to grow 6.50% annually during
the life of the project. The companys tax rate is 35.00%. At t = 3, the projects economic life is
complete, but it will have a salvage value (before-tax) of $95,500.00 after three years. The projects
WACC is 16.25%. What is the projects net present value (NPV)? ($17,806.21)