Question

A company is considering a 6-year project that requires an initial outlay of $18,000. The project engineer has estimated that the operating cash flows will be $4,000 in year 1, $7,000 in year 2, $7,000 in year 3, $7,000 in year 4, $7,000 in year 5, and $7,000 in year 6. At the end of the project, the equipment will be fully depreciated, classified as 5-year property under MACRS. The project engineer believes the equipment can be sold for $5,000 at the end of the project. If the tax rate is 26% and the required rate of return is 13%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Answer 1

Year	0	1	2	3	4	5	6
Operating cash flow		4000.00	7000.00	7000.00	7000.00	7000.00	7000.00
Tax shield on depreciation		936.00	1497.60	898.56	539.14	539.14	269.57
Less:Initial outlay	18000.00
Salvage value							5000.00
Less: tax							1300.00
Net Cash Flow	-18000.00	4936.00	8497.60	7898.56	7539.14	7539.14	10969.57
NPV @ 13%	12481.83
MACRS Depreciation		1	2	3	4	5	6
Depreciation rate		20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
Dpereciation value		3600.00	5760.00	3456.00	2073.60	2073.60	1036.80