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Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment...

Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 200,000 dollars today. The equipment would be depreciated straight-line to 20,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 29,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 164,000 dollars and relevant costs are expected to be 44,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 10.01 percent. What is the NPV of the project?

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Answer #1
Annual Operating cashflows
YEar1 YEar2 YEar3
Annual revennues 164000 164000 164000
Less: Annual expenses 44000 44000 44000
Less: Depreciation 90000 90000 0
Before tax Income 30000 30000 120000
Less: tax @ 50% 15000 15000 60000
After tax income 15000 15000 60000
Add: Depreciation 90000 90000 0
Annual Operating cashflows 105000 105000 60000
NPV:
YEar0 YEar1 YEar2 YEar3
Initial investment -200000
Annual Operating CF 105000 105000 60000
After tax salvage 29000
Net Cashflows -200000 105000 105000 89000
PVF at 10.01% 1 0.908265 0.824946 0.749269
Present Value of CF -200000 95367.85 86619.3 66684.98
NPV 48672
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