Question

nitial cost beginning at time 0 = $15,000

Annual revenues beginning at time 1 = $20,000

Annual operating costs (not including depreciation) = $13,000

Annual depreciation = $3,000

Tax rate = 40%

Expected life of investment = 5 years

What is the NPV of this investment? Round answer to the ones place. Do not enter commas. Enter negative numbers with a negative sign. Enter positive numbers without a sign. $ Blank 2. Fill in the blank, read surrounding text.

Answer 1

Solution:

Note: As discount rate is not provided in question let discount to be considered in computation of NPV is 10%.

Computation of annual cash inflows
Particulars	Amount
Annual revneues	$20,000.00
Annual operating costs	$13,000.00
Depreciation	$3,000.00
Income before taxes	$4,000.00
Income tax expense (40%)	$1,600.00
Net income	$2,400.00
Add: depreciation	$3,000.00
Annual cash inflows	$5,400.00

Computation of NPV
Particulars	Period	Amount	PV factor at 10%	Present Value
Cash outflows:
Initial investment	0	$15,000.00	1	$15,000
Present Value of Cash outflows (A)				$15,000
Cash Inflows
Annual cash inflows	1-5	$5,400.00	3.7908	$20,470
Present Value of Cash Inflows (B)				$20,470
Net Present Value (NPV) (B-A)				$5,470