The Jerome Inc. western regional branch has been looking to install a new distri

Question

The Jerome Inc. western regional branch has been looking to install a new distribution center. The analysts have run the numbers on the distribution center costs and annual inflow from the investment. The project will cost $5 million at the beginning of the first year. The project will generate $1 million in earnings before interest and taxes at the end of each year. Jerome is in the 35% tax bracket and annual depreciation equates to $500,000 per year. The distribution center’s end of the fifth year’s salvage equals its book value, or $2,500,000. Compute the project’s NPV, assuming Jerome's WACC equals 12%.

A. -$1,238,328
B. $564,060
C. $1,825,731
D. -$66,776

Explanation / Answer

take discount rate for cash flw = WACC = $2,500,000 so by taking cash flows we get NPV = -$1,238,328 answer is A

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