Question

Violet Sky Banking is considering a project that would last for 2 years. The project would involve an initial investment of 186,000 dollars for new equipment that would be sold for an expected price of 145,000 dollars at the end of the project in 2 years. The equipment would be depreciated to 25,000 dollars over 7 years using straight-line depreciation. In years 1 and 2, relevant annual revenue for the project is expected to be 161,000 dollars per year and relevant annual costs for the project are expected to be 44,000 dollars per year. The tax rate is 50 percent and the cost of capital for the project is 5.48 percent. What is the net present value of the project?

Answer 1

			YEar1	YEar2
Annual revenues			161000	161000
Less: Annual cost			44000	44000
Less: Depreciation			23000	23000	(186000-25000)/7
Before Tax Incme			94000	94000
Less: Tax @ 50%			47000	47000
After Tax iNcome			47000	47000
Add: Dep			23000	23000
Add: After tax salvage				142500	(145000 - 2500)
Annual cashflows			70000	212500
PVF at 5.48%			0.948047	0.898793
Present value of CF			66363.29	190993.5
Total Inflows					257357
Less: Initial investment					-186000
NPV					71357