1. Shelly’s Boutique is evaluating a project which will increase annual sales by $96,000 and annual costs by $37,000. The project will initially require $125,000 in fixed assets which will be depreciated straight-line to a zero book value over the 5-year life of the project. The applicable tax rate is 35 percent. What is the operating cash flow for this project?
2. A fashion clothing company is considering investing in new machinery to improve its productivity over the next 5 years. You have been given the following information:
• Sales are predicted to increase by $1,500,000 in year 1 and continue at this level.
• The new machinery costs $10 million payable immediately.
• It will be depreciated over 5 years on a straight line basis.
• All the old machinery can be sold for $2 million.
• The new equipment is more complicated and will cost $160,000 per year every year to maintain, as against the $100,000 for the old machines, but other running costs will be reduced by $120,000.
• Finance for the purchase needs to be raised via a loan which requires annual interest payments of $300,000.
• Wages will be reduced by $100,000 due to increased automation.
• At the end of the five years the machinery will have a scrap value of $2million.
• The feasibility study for this project (already completed and paid for) cost $200,000.
• The cost of capital on investment appraisal for this level of risk is 7.5%.
Identify which of these items would be included in an NPV calculation and calculate the NPV. You may ignore tax and inflation.