Question

A 10-yr project has an initial cost of $500,000 for fixed assets. The fixed assets will be depreciated to a $0 book value using a 20-yr straight line depreciation method.

Each year, annual revenue is $60,000 and cost is $10,000.

After 10 years, you will terminate the project. You expect to sell the the fixed assets for $300,000.

The project is financed by 40% equity and 60% debt. The required rate of return on equity is 7% and the borrowing cost is 3%.

Assume the tax rate is 25%.

What is the project's NPV?

Group of answer choices

-51,056

21,937

29,441

43,662

Answer 1

WACC = Cost of equity * weight of equity + cost of debt * (1-tax%) * Weight of debt = 7%*40% + 3%*(1-25%)*60% =

4.15%

Revenue	60000
(-) Cost	10000
(-) Depreciation [ 500000/20 ]	25000
Profit before tax	25000
(-) Tax@ 25%	6250
Net income	18750
(+) Depreciation	25000
Annual cashinflow	43750

Depreciation for 10 years = 25000 * 10 =	250000
Book value at the end of 10 years = Cost - Depreciation for 10 years = 500000 - 250000 =	250000
Gain on sale = Cost - Book value at the end of 10 years = 300000 - 250000 =	50000
After tax salvage value = Sales value - ( Gain on sale * Tax% ) = 300000 - (50000*25%) =	287500

NPV = 43750*(1-(1+4.15%)^-10)/4.15% + 287500/(1+4.15%)^10 - 500000 =

43662