Question

Global Transport is considering a new project with relevant data shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?

Risk-adjusted WACC 10.0%

Net investment cost (depreciable basis) $90,000

Straight-line deprec. rate 33.3333%

Sales revenues, each year $75,000

Operating costs (excl. deprec.), each year $35,000

Tax rate 35.0%

Answer 1

Annual depreciation = 90,000 * 0.333333 = 30,000

Operating cash flow from year 1 to year 3 = (Revenue - operating costs - depreciation)(1 - tax) + depreciation

Operating cash flow from year 1 to year 3 = (75,000 - 35,000 - 30,000)(1 - 0.35) + 30,000

Operating cash flow from year 1 to year 3 = 6,500 + 30,000

Operating cash flow from year 1 to year 3 = 36,500

NPV = Present value of cash inflows - present value of cash outflows

NPV = -90,000 + 36,500 / (1 + 0.1)¹ + 36,500 / (1 + 0.1)² + 36,500 / (1 + 0.1)³

NPV = $770.10