Answer Happy

A firm is considering investing in a small factory for a period
of 4 years. Given the following information calculate the NPV
of the proposed investment.
The factory will cost €20,000 and its salvage value is expected
to be €5,000 in 4 years’ time. The firm will depreciate the
factory to a final value of zero over the 4 year period. Any
difference between the salvage value and the book value of the
equipment will be treated as a taxable gain.
The revenue from the factory at the end of the first year will
be €7,000 and the expenses will be €2,000, both will rise with
inflation which is expected to be 2% per annum.
The initial investment in working capital is €1,000 and this is
expected to increase by €100 every year.
The firm’s corporate tax rate is 30%. Calculate the
Investment Cashflows, Operating Cashflows and Working Capital
Cashflows for this investment proposal.
If the correct discount rate is 11%, calculate the NPV of this
investment for the firm and comment on whether the firm should
undertake this investment or not.