QUESTION 19 A company is considering a 6-year project that requires an initial o
ID: 2780889 • Letter: Q
Question
QUESTION 19 A company is considering a 6-year project that requires an initial outlay of $25,000. The project engineer has estimated that the operating cash flows will be $3,000 in year 1, $5,000 in year 2, $7,000 in year 3, $7,000 in year 4, $7,000 in year 5, and $8,000 in year 6. At the end of the project, the equipment will be fully depreciated, classified as 5-year property under MACRS. The project engineer believes the equipment can be sold for $5,000 at the end of the project. If the tax rate is 30% and the required rate of return is 15%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)
Explanation / Answer
NPV = CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + ... + CF6 / (1 + r)^6 + Salvage x (1 - tax) / (1 + r)^6
= -25000 + 3000 / 1.15 + 5000 / 1.15^2 + ... 8000 / 1.15^6 + 5000 x (1 - 30%) / 1.15^6
= -1,553.70
CF0 -25000 CF1 3000 CF2 5000 CF3 7000 CF4 7000 CF5 7000 CF6 8000 Salvage 5000 NPV -$1,553.70