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Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which...

Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment is scrapped. The project will increase pre-tax revenues to the firm by $725,000 a year. The tax rate is 35 percent. If the firm requires a 16 percent rate of return what is the Net Present Value of this project?

$447,202.05 $233,799.34 -$172,937.49 $337,210.69 -$87,820.48

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Answer #1

Annual depreciation = 2,460,000 / 10

Annual depreciation = 246,000

Operating cash flow from year 1 to year 10 = (Revenue - depreciation)(1 - tax) + depreciation

Operating cash flow from year 1 to year 10 = (725,000 - 246,000)(1 - 0.35) + 246,000

Operating cash flow from year 1 to year 10 = 311,350 + 246,000

Operating cash flow from year 1 to year 10 = 557350

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = Annuity * [1 - 1 / (1 + r)^n] / r - Initial investment

Net present value = 557,350 * [1 - 1 / (1 + 0.16)^10] / 0.16 - 2,460,000

Net present value = 557,350 * [1 - 0.226684] / 0.16 - 2,460,000

Net present value = 557,350 * 4.833227 - 2,460,000

Net present value = $233,799

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