Question

# Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment...

Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 340,000 dollars today. The equipment would be depreciated straight-line to 20,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 34,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 212,000 dollars and relevant costs are expected to be 111,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 9.78 percent. What is the NPV of the project?

Statement showing NPV

 Particulars 0 1 2 3 Total = Sum of NPV Purchase price of equipment -340000 Revenue 212000 212000 212000 Expense -111000 -111000 -111000 Depreciation -160000 -160000 -20000 PBT -59000 -59000 81000 Tax @ 50% 29500 29500 -40500 PAT -29500 -29500 40500 Add: Depreciation 160000 160000 20000 Annual cash flow 130500 130500 60500 Salvage value of equipment 34000 Total cash flow -340000 130500 130500 94500 PVIF @ 9.78% 1.0000 0.9109 0.8298 0.7558 PV -340000.00 118874.11 108283.94 71426.95 -41414.99

Thus NPV = -41414.99 \$

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