Question

You are considering the following project. What is the NPV of the project? Project life: 3...

You are considering the following project. What is the NPV of the project?

Project life: 3 years

Equipment:

     Cost: $18,000

     Economic life: 3 years

     Salvage value: $4,000

Initial investment in net working capital: $2,000

Revenue: $13,000 in year 1, with a nominal growth rate of 5% per year

Fixed cost: $3,000 in year 1

Variable cost: 30% of revenue

Corporate tax rate (T): 40%

WACC for the project: 10%

This project does not create incidental effect.

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Answer #1
Operating Cashflows Year-1 Year-2 Year-3
Annual Revenues 13000 13650 14332.5
Less: Variable cost (@30%) 3900 4095 4299.75
Less: Fixed cost 3000 0 0
lEss: Depreciation (18000-4000)/3 4667 4667 4667
Before Tax Income 1433 4888 5365.75
Less: Tax @ 40% 573.2 1955.2 2146.3
After Tax Income 859.8 2932.8 3219.45
Add: Dep 4667 4667 4667
Operating cashflows 5526.8 7599.8 7886.45
Salvage value released 4000
WC released 2000
Cashflows of each Year 5526.8 7599.8 13886.45
PVF @10% 0.909091 0.826446 0.751315
Present Value of CF 5024.364 6280.826 10433.1
Total Present value of Cf 21738
Less: Total Investment (18000+2000) 20000
NPV 1738
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