Inc. Corp. is considering a new investment whose data are shown below. The equip
ID: 2734388 • 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
d. $23,852 Statement showing Cash flows Particulars Time PVf@10% Amount PV Cash Outflows (FA) - 1.00 (75,000.00) (75,000.00) Cash Outflows (WC) - 1.00 (15,000.00) (15,000.00) PV of Cash outflows = PVCO (90,000.00) Cash inflows 1.00 0.9091 41,250.00 37,500.00 Cash inflows 2.00 0.8264 41,250.00 34,090.91 Cash inflows 3.00 0.7513 41,250.00 30,991.74 Cash inflows 3.00 0.7513 15,000.00 11,269.72 PV of Cash Inflows =PVCI 113,852.37 NPV= PVCI - PVCO 23,852.37 Sales Revenue 75,000.00 Less Operating Costs (25,000.00) Less Depreciation = 75,000/3 (25,000.00) Income before tax 25,000.00 Less Tax @35% (8,750.00) Income aftre tax 16,250.00 Add depreciation 25,000.00 Cash flows after tax 41,250.00