NPV calculations

The project being considered is to manufacture supply and partners must make a decision to accept or discard the project.

Questions:

Perform the final NPV calculations in order to make a business decision whether to move on and pursue the project.

Depreciation and its tax consequences to the cash flow of the project?

Should this opportunity be pursued?

Data required for calculations:

The following are the best estimates of the values to the data that:

• You can borrow funds from your bank at 3%.
• The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project.
• The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000.
• The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000.
• Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment.
• After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000).
• The discount rate you are assuming is now 7%.