Question

Genoa company is considering a new investment and the relevant information is below. The equipment depreciates at a straight-line basis over the project's three-year life, would have no salvage value, and requires additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. cash flows are constnt for the life of the project. What is the project's NPV?

WACC                                                                             9%

Net investment in fixed assets (depreciable basis)                     $75,000

Required net operating working capital at t=0                           $15,000

Straight-line depreciation rate                                                   33.333%

Annual sales revenues                                                                $75,000

Annual operating costs (excl. depreciation)                              $25,000

Tax rate                                                                         21.0%

Answer 1

	Year 0	Year 1	Year 2	Year 3
Fixed assets	-75000
Working capital	-15000
Annual sales		75000	75000	75000
Operating cost		25000	25000	25000
profit before dep & tax		50000	50000	50000
Dep		25000	25000	25000
Profit before tax		25000	25000	25000
Tax@21%		5250	5250	5250
Profit after tax		19750	19750	19750
Add depreciation (noncash expense)		25000	25000	25000
Recovery of working capital				15000
Net cash flow	-90000	44750	44750	59750

NPV = -90000+44750/(1+9%)^1+44750/(1+9%)^2+59750/(1+9%)^3 = $34,858.19