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

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