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.)

Project cost of capital (r) 10.0%

Opportunity cost $100,000

Net equipment cost (depreciable basis) $65,000

Straight-line deprec. rate for equipment 33.333%

Sales revenues, each year $123,000

Operating costs (excl. deprec.), each year $25,000

Tax rate 25%

Answer 1