Sub-Prime Loan Company is thinking of opening a new office and the key data are
ID: 2665565 • Letter: S
Question
Sub-Prime Loan Company is thinking of opening a new office and the key data are shown below. The company owns the biulding that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV?(Hint: Cash flows are constant in years 1-3)
WACC = 10%
Oppertunity cost = $100,000
Net equipment cost(depriciable basis) = $65,000
Straight-line depr. rate for equipment = 33.333%
Sales revenues, each year = $123,000
Operating costs(excl depr) each year = $25,000
Tax rate = 35%
Explanation / Answer
correct answer = $12,271
T-0
1
2
3
investmnet
65000
Opportunity ocst
-100000
revenues
123000
123000
123000
Operating
-25 000
-25 000
-25 000
Cassis are
-21 667
-21 667
-21 667
ebit
76 333
76 333
76 333
-TAXES
26 717
26 717
26 717
AFTER TAX EBIT
49617
49617
49617
DEPREIATION
21667
21667
21667
CASH FLOW
-165 000
71 283
71 283
71 283
NPV= 12,271
T-0
1
2
3
investmnet
65000
Opportunity ocst
-100000
revenues
123000
123000
123000
Operating
-25 000
-25 000
-25 000
Cassis are
-21 667
-21 667
-21 667
ebit
76 333
76 333
76 333
-TAXES
26 717
26 717
26 717
AFTER TAX EBIT
49617
49617
49617
DEPREIATION
21667
21667
21667
CASH FLOW
-165 000
71 283
71 283
71 283