Question

A firm is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require 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. What is the project's NPV ( no decimal places)  (Hint: Cash flows from operations are constant in Years 1 to 3.)

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

Particulars	Year 0	Year 1	Year 2	Year 3
Investment in fixed assets	-75,000
Net working capital	-15,000
Annual Sales		75,000	75,000	75,000
Less: Annual operating costs		25,000	25,000	25,000
Less:Depreciation (33.333%)		25,000	25,000	25,000
Operating Profit		25,000	25,000	25,000
Less: Taxes (21%)		5,250	5,250	5,250
Profit after taxes		19,750	19,750	19,750
Add: Depreciation		25,000	25,000	25,000
Cash flows from operations		44,750	44,750	44,750
Recovery of working capital				15,000
Net cash flows	-90,000	44,750	44,750	59,750
PV factor at 9% (1/1+r)^n	1.00000	0.91743	0.84168	0.77218
Discounted cash flows	-90,000	41,055	37,665	46,138
NPV	34,858