Question

You are evaluating a capital project with a Net Investment of $800,000, which includes an increase in net working capital of $8,000. The project has a life of 20 years with an expected salvage value of $100,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $120,000 per year and operating expenses by $14,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 12%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

Answer 1

Depreciable investment is 800000

Salvage value is 100000

Depreciable value is 700000

Life is 20 years

Depreciation per year is = 700000/20 = 35000

Terminal Value is 108000

Initial investment is 808000

Expected return is 12%

First we will calculate operating cash flows

Revenue is 120000

Less costs = 14000

Operating profit is 106000

Less depreciation 35000

Profit before tax = 71000

Less tax@40% = 28400

Net profit = 42600

Add depreciation 35000

Operating cash flow is 77600

Npv is present value of cash flows less initial investment

P.v of cash flows are

= 77600(PVIFA 12% 20Y) + 108000/(1.12)^20

= 77600(7.4694) + 11196

= 590121

Less initial investment = 808000

= -217178.56