Question

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5.23 million to setup and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.  

Assume that THSI's cost of capital is 9.7% p.a.

Compute the NPV of the temporary housing facility to the nearest dollar. (Do not enter a dollar sign, just enter your answer as a whole number, either positive or negative)

Answer 1

Year 1 FCF = (revenues-expenses-depr.)*(1-tax rate)+depr.

=(20000000-12000000-3000000)*(1-0.35)+3000000=6250000

Discount rate	9.700%
Year	0	1
Cash flow stream	-5230000	6250000
Discounting factor	1.000	1.097
Discounted cash flows project	-5230000.000	5697356.427
NPV = Sum of discounted cash flows
NPV Project =	467356
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor