A firm is considering a replacement project which requires the initial outlay of $300,000 which includes both an after-tax salvage from the old asset of $12,000 and an additional working capital investment of $8,000. The 12-year project is expected to generate annual incremental cash flows of $54,000 and have an expected terminal value at the end of the project of $20,000. The cost of capital is 15 percent, and the firm's marginal tax rate is 40 percent. Calculate the net present value of this project.

-3,548.43

Explanation:

DF = Discount factor

Year    Cash flow     DF(15%)   Present Value

0       (300,000)        1             -300,000

1         54,000         0.870        46,956.52

2        54000          0.756        40,831.76

3        54000          0.658        35,505.88

4        54,000         0.572         30,874.68

5        54000          0.497         26,847.54

6        54000          0.432         23,345.69

7        54000          0.376          20,300.06

8        54000          0.327          17,652.70

9        54000          0.284          15,350.17

10      54000          0.247           13,347.97

11       54000          0.215            11,606.93

12      74000          0. 187           13,831.13

Year 12 calculation =   54000 +20000 x 0.6 + 8000

                                =   74000

NPV = -300,000 +  46,956.52 + 40,831.76 + 35,505.88 + 30,874.68 + 26,847.54  + 23,345.69 + 20,300.06 + 17,652.70 + 15,350.17 + 13,347.97 + 11,606.93 + 13,831.13

NPV = -3,548.43

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