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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?

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Answer #1

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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