Inc. Corp. is considering a new investment whose data are shown below. The equip
ID: 2732286 • Letter: I
Question
Inc. Corp. is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.) WACC 10.0% Net investment in fixed assets (basis) $75,000 Required new working capital $15,000 Straight-line deprec. rate 33.333% Sales revenues, each year $75,000 Operating costs (excl. deprec.), each year $25,000 Tax rate 35.0% a. $23,000 b. $29,345 c. $41,000 d. $23,852 e. $49,309
Explanation / Answer
ANSWER = D) $23852
Year -1 Year -2 Year -3 Sales revenue 75000 75000 75000 Less- operating cost 25000 25000 25000 Less- depreciation 25000 25000 25000 Net profit 25000 25000 25000 Less- tax @35% 8750 8750 8750 Net profit after tax 16250 16250 16250 Add- depreciation 25000 25000 25000 Add- working captial 15000 Net cashflow 41250 41250 56250 Present value factor 0.9091 0.8264 0.7513 Present value of cash inflow 37500 34091 42261 Present value of cash inflow 113852 Less- present value of cash outflow Fixed asset 75000 working capital 15000 NET PRESENT VALUE 23852