Century Roofing is thinking of opening a new warehouse, and the key data are sho
ID: 2774915 • Letter: C
Question
Century Roofing is thinking of opening a new warehouse, 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 warehouse. 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)
$60,000
Straight-line deprec. rate for equipment
33.333%
Sales revenues, each year
$121,000
Operating costs (excl. deprec.), each year
$20,000
Tax rate
40%
WACC
10.0%
Opportunity cost
$100,000
Net equipment cost (depreciable basis)
$60,000
Straight-line deprec. rate for equipment
33.333%
Sales revenues, each year
$121,000
Operating costs (excl. deprec.), each year
$20,000
Tax rate
40%
Explanation / Answer
110598
year sales EQP cost OP cost Gross Cashinflow Depreciation Taxable income Tax@40% Net cash flow rate@10% PV 0 60000 -60000 1 -60000 1 121000 20000 101000 20000 81000 32400 68600 0.90909091 62363.64 2 121000 20000 101000 20000 81000 32400 68600 0.82644628 56694.21 3 121000 20000 101000 20000 81000 32400 68600 0.7513148 51540.2 NPV110598