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Please help me verify that the response is accurate for the...

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Please help me verify that the response is accurate for the...

Please help me verify that the response is accurate for the following problem.

Table 1

Projected Electrobicycle Financial Projection

Numbers in $000's

 TodayYear 1Year 2Year 3Year 4Year 5
Revenues $1,000$1,500$3,000$6,000$12,000
After-tax earnings ($500)$100$300$600$1,200
   Project Cash Flow   
After-tax earnings ($500)$100$300$600$1,200
Plus: Depreciation $400$400$400$400$400
Less: Cost of plant, equipment($2,000)$0$0$0$0$0
Less: Working capital($1,000)($200)($200)($200)($200)($200)
Plus: Recovery of working capital n/an/an/an/a$2,000
Plus: Salvage value n/an/an/an/a$600
Annual project cash flow ($300)$300$500$800$4,000

Note: n/a = not applicable

 

Calculate:

  • Determine the NPV for the Electrobicycle project. Use the annual project cash flow from the table above. For the required rate of return, use the percent value from your birth date. For example, if your birthday falls on the 16th of the month, the required rate of return would be 16%.

Please help me confirm that the following calculations are correct. Compare how the required rate of return differs from 11%. Explain how the different rate of returns impacts the concluded NPV. Explain why the salvage value is added to the cash flows in the project's final year.

 

From my understanding you need to figure out how much cash flow by subtracting the working capital from the cash flow.

As for the required rate of return. In order to find out how profitable a project might be, you need to know how much of a profit the investor is going to make.

NPV = the present value of cash flow - the present value of initial cash outflow

Present value of cash inflow - sum Cash inflow / (1+r)n

R - discount rate

N- number of years

15 % is the discount rate

Present value of cash inflow -300 / (1+15%)1 = 300 (1+15%)2 + 500 / (1+ 15%)3 +800 / (1+15%)4 + 4000 / (1+ 15%)5 = $2,740.84

Present value of cash outflow - 2000 for the equipment and 1000 for the working capital = 3000

NPV = $2,740.84 - $3,000 - $ -259.16 thousand 


 

Answer & Explanation

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Answered by charne.torres on coursehero.com

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