Sub-Prime Loan Company is thinking of opening a new office, and the key data are
ID: 2669619 • 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 building 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--10.0%
Opportunity cost--$100,000
Net equipment cost (depreciable basis)--$65,000
Straight-line depr. rate for equipment--33.333%
Sales revenues, each year--$141,000
Operating costs (excl. depr.), each year--$25,000
Tax rate---35%
Answer
A)$35,161
B)$41,366
C)$35,989
D)$43,848
E)$34,334
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Explanation / Answer
WACC
10%
YEAR ZERO
YEAR ONE
YEAR TWO
YEAR THREE
EQUIPMNET COST
65,000
SALES
123,000
123,000
123,000
OPERATION EXPENSE
-25000
-25000
-25000
EBITDA
98000
98000
98000
-21667
-21667
-21667
EBIT
76333
76333
76333
TAX -35%
26717
26717
26717
PROFIT
49617
49617
49617
ADD--DEPR
21667
21667
21667
ADD--DEPR
NET CF
65,000
Answer
A)$35,161
B)$41,366
C)$35,989
D)$43,848
E)$34,334
WACC
10%
YEAR ZERO
YEAR ONE
YEAR TWO
YEAR THREE
EQUIPMNET COST
65,000
SALES
123,000
123,000
123,000
OPERATION EXPENSE
-25000
-25000
-25000
EBITDA
98000
98000
98000
-21667
-21667
-21667
EBIT
76333
76333
76333
TAX -35%
26717
26717
26717
PROFIT
49617
49617
49617
ADD--DEPR
21667
21667
21667
ADD--DEPR
NET CF
65,000