Question

A project has an initial investment in equipment of​ $310,000 and in net working capital of​ $62,000. The equipment will be depreciated over the​ 3-year life of the project to a salvage value of​ $155,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is​ $345,000 and the discount rate is 25 percent. What is the​ project's net present value if the tax rate is 34​ percent?

A. ​$380,800.00 B. ​$442,800.00 C. ​$385,561.60 D. ​$333,184.00 E. ​$412,544.00

Answer 1

Answer is $412,544

Initial Investment = $310,000
Salvage Value = $155,000
Useful Life = 3 years

Initial Investment in NWC = $62,000

Annual Operating Cash Flow = $345,000

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$310,000 - $62,000
Net Cash Flows = -$372,000

Year 1 to Year 2:

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $345,000

Year 3:

Net Cash Flows = Operating Cash Flow + NWC recovered + Salvage Value
Net Cash Flows = $345,000 + $62,000 + $155,000
Net Cash Flows = $562,000

Required return = 25%

NPV = -$372,000 + $345,000/1.25 + $345,000/1.25^2 + $562,000/1.25^3
NPV = $412,544