Question

Cookie Cutter Corp. is considering a new project whose data are shown below. The equipment that would be used has a 5-year tax life, would be depreciated by the straight-line method over its 5-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 5-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the second decimal place.

Risk-adjusted WACC = 8.6%

Net investment cost (depreciable basis) = $140,000

Straight-line depreciation rate = 20.00% per year

Cash Sales revenues, each year = $71,000

Annual cash operating costs (excluding depreciation) = $25,000

Tax rate = 22.0%

Answer 1

Annual Depreciation = 20%*$140000

= $28000

Annual operating cash flow = (Sales-Cash operating expenses-Depreciation)*(1-Tax rate) + Depreciation

= (71000-25000-28000)*(1-0.22)+28000

= 18000*(1-0.22)+28000

= 14040+28000

= 42040

Therefore, the NPV is $25232.28