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Bertha Co. is considering a new project that will generate OCFs of 114,913 over the 4 year life of the project. The project will require $1,215,182 of new equipment that can be sold for 20% of initial cost (consider this an after-tax figure) and will require an investment in net working capital of $82,090. If Bertha has a required return of 8%, what is the npv for this project?

Answer :

To calculate the Net Present Value (NPV) of the project, we need to discount the cash flows generated by the project to their present value and then subtract the initial investment. Here are the steps to calculate the NPV:

Calculate the after-tax salvage value of the equipment:

Salvage Value = 20% * Initial Cost = 0.20 * $1,215,182 = $243,036

Determine the initial investment:

Initial Investment = Cost of New Equipment + Investment in Net Working Capital

Initial Investment = $1,215,182 + $82,090 = $1,297,272

Calculate the present value of the cash flows:

Year 1: $114,913 / (1 + Required Return)^1

Year 2: $114,913 / (1 + Required Return)^2

Year 3: $114,913 / (1 + Required Return)^3

Year 4: $114,913 / (1 + Required Return)^4

Sum the present values of the cash flows:

PV of Cash Flows = Year 1 + Year 2 + Year 3 + Year 4

Calculate the NPV:

NPV = PV of Cash Flows - Initial Investment

Let's perform the calculations:

Year 1: $114,913 / (1 + 0.08)^1 = $106,363.89

Year 2: $114,913 / (1 + 0.08)^2 = $98,611.74

Year 3: $114,913 / (1 + 0.08)^3 = $91,217.75

Year 4: $114,913 / (1 + 0.08)^4 = $84,155.76

PV of Cash Flows = $106,363.89 + $98,611.74 + $91,217.75 + $84,155.76 = $380,349.14

NPV = $380,349.14 - $1,297,272 = -$916,922.86

Therefore, the NPV for this project is approximately -$916,922.86. Since the NPV is negative, the project would result in a net loss and may not be considered financially viable.

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