Question

Firm Y has the opportunity to invest in a new venture. The projected cash flows are as follows:

Year 0: Initial cash investment in the project of $300,000.

Years 1, 2, and 3: Generate cash revenues of $50,000.

Years 1, 2, and 3: Incur fully deductible cash expenditures of $30,000.

Year 3: Incur nondeductible cash expenditure of $10,000.

Year 3: Receive $300,000 cash as a return of the initial investment.

Assuming a 6 percent discount rate and a 30 percent marginal tax rate, compute the NPV of the cash flows resulting from investment in this opportunity. Use Appendix A and Appendix B. (Round discount factor(s) to 3 decimal places. Cash outflows and negative amounts should be indicated by a minus sign.)

	Year 0	Year 1	Year 2	Year 3
Before-tax cash flow	(300,000)
Tax Cash Flow
After Tax Cash Flow	(300,000)
PV
NPV

Answer 1

Year	0	1	2	3
Initial cash investment	-300000
cash revenue		50000	50000	50000
less deductible expenditure
less non deductible expenditure				10000
operating profit		20000	20000	10000
less tax -30%		6000	6000	3000
after tax profit		14000	14000	7000
add deductible expenditure		30000	30000	30000
cash recovery from project				300000
net operating cash flow	-300000	30000	30000	330000
present value of cash flow = cash flow/(1+r)^n r =	-300000	28301.88679	26699.8932	277074.3634
Net present value =sum of present value of cash flow	32076.14339