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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 300,000 dollars today. The equipment would be depreciated straight-line to 30,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 40,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 183,000 dollars and relevant costs are expected to be 66,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 5 percent. What is the NPV of the project?

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Answer #1
YEar1 YEar2 Year3
Annual revenues 183000 183000 183000
Less: Annual cost 66000 66000 66000
Less: Depreciation 135000 135000
Before Tax Incme -18000 -18000 117000
Less: Tax @ 50% 9000 9000 58500
After Tax iNcome -9000 -9000 58500
Add: Dep 135000 135000
Add: After tax salvage 40000
Annual cashflows 126000 126000 98500
PVF at 5% 0.952381 0.907029 0.863838
Present value of CF 120000 114285.7 85088
Total Inflows 319374
Less: Initial investment -300000
NPV 19374
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