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.

Select one:

a. -$1,286.65

b. -$1,261.12

c. -$1,310.09

d. -$1,338.68

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Homework Answers

Answer #1
Annual Operating cashflows
Year-1 Year-2 Year-3
Revenues 13000 13650 14332.5
Variable c ost 3900 4095 4299.75
Fixed cost 3000 3000 3000
Depreciation 4667 4667 4666
(18000-4000)/3
Before tax income 1433 1888 2366.75
Less: Tax @ 40% 573.2 755.2 946.7
After tax income 859.8 1132.8 1420.05
Add: Depreciation 4667 4667 4666
Annual cashflows 5526.8 5799.8 6086.05
NPV:
Year-0 Year-1 Yea-2 Year-3
Initial investment -18000
Investment in WC -2000
Annual Cashflows 5526.8 5799.8 6086.05
Salvage value 4000
Release in WC 2000
Net cashflows -20000 5526.8 5799.8 12086.05
PVF at 10% 1 0.909091 0.826446 0.751315
Present value of CF -20000 5024.364 4793.223 9080.428
NPV -1102
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