Question

You are considering an investment in a new factory that will operate for 3 years. The initial investment will be 193567. The nominal revenues at the end of Year 1 will be $250000. Revenues will grow at a real rate of 1%. Inflation will be 2%. The nominal costs at the end of Year 1 will be $30000. Costs will grow at a nominal 4% rate. The investment will depreciated on a straight line basis to zero over 3 years. It will have zero market salvage value at the end of 3 years. The required real rate of return for the investment is 8%. The tax rate is 21%. What is the NPV of the project?

Select one:

a. $283581

b. $352777

c. $224708

d. $298265

e. $282780

Answer 1

the correct answer is option 'E' i.e. $282,780

detail answer is explained below

year	revenue $ (A)	costs $ (B)	depreciation ($193,567-$0)/3yrs $ (C)	profit before tax $ D=[A-(B+C)]	tax@21% E=D*21% $	net income F=D-E $	depreciation $	after tax-OCF G=F+C $
1	250,000	30,000	64,522	155,478	32,650	122,828	64,522	187,350
2	257,550 (note-1)	31,200 (note2)	64,522	161,828	33,984	127,844	64,522	192,366
3	265,328 (note-1)	32,448 (note2)	64,522	168,358	35,355	133,003	64,522	197,525