Question

THSI is considering a project that involves setting up a temporary housing facility an an area damaged bu a hurricane. THSI will lease space in this facility to various agencies and groups. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation(paid in one year). operating expenses are expected to total $5 million during this year and depreciation expense will be another $4 million. THSI will require no working capital for this investment. THSI marginal tax rate is 35%

assume that the cost of capital for this project is 15%. the net present value of this project is closest to:

$9,931,304

-$11

$4,695,652

-$4695,652

Answer 1

Answer:

Correct answer is:

$4,695,652

Explanation:

Year 0:

Initial investment = $5 million = $5,000,000

Year 1:

Cash inflow = (Revenue - Operation expenses) * (1 - Tax rate) + Depreciation tax shield

= (20000000 - 5000000) * (1 - 35%) + 4000000 * 35%

= $11,150,000

NPV = Year 1 cash flows * PV of $1 for one year at 15% rate - Initial investment

= 11150000 * 1 / (1+15%) - 5000000

= $4,695,652

Hence option 3 is correct and other options 1, 2 and 4 are incorrect.