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|
|Tax @ 50%||29500||29500||-40500|
|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|
Thus NPV = -41414.99 $
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