Calculate the NPV for the Following Capital Budgeting Proposal: $100,000

Essay

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over five years to an expected salvage value of $5,000, 35 percent tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, 11 percent cost of capital.
$\begin{array}{|l|r|r|r|r|r|r|}\hline & {\text { Year 0 }} & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\\hline \text { Cost } & -100,000 & & & & & \\\hline \text { Change in Working } & -8,000 & & & & & 8,000 \\\hline \text { Capital } & & & & & & \\\hline \text { Revenues } & 45,000 & 45,000 & 45,000 & 45,000 & 45,000 & \\\hline \text { - Expenses } & -15,000 & -15,000 & -15,000 & -15,000 & -15,000 & \\\hline \text { - Dep } & & -19,000 & -19,000 & -19,000 & -19,000 & -19,000 \\\hline \text { = Pretax Profit } & & 11,000 & 11,000 & 11,000 & 11,000 & 11,000 \\\hline \text { Taxes } & & 3,850 & 3,850 & 3,850 & 3,850 & 3,850 \\\hline \text { Profit } & & 7,150 & 7,150 & 7,150 & 7,150 & 7,150 \\\hline \text { Salvage Value } & & & & & & 5,000 \\\hline \text { Tax effect } & & & & & 0 & 5,000 \\\hline \text { Cash Flows } & -108,000 & 26,150 & 26,150 & 26,150 & 26,150 & 39,150\\\hline\end{array}$