Question

A project has an initial requirement of $140,232 for equipment. The equipment will be depreciated to a zero book value over the 4-year life of the project. The investment in net working capital will be $2,789. All of the net working capital will be recouped at the end of the 4 years. The equipment will have an estimated salvage value of $6,601. The annual operating cash flow is $22,835. The cost of capital is 18 percent. What is the project’s net present value if the tax rate is 32 percent?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. If the NPV is negative, then enter the answer as an negative number. For example, if your answer is -1051.236, then enter as -1051.24.

Answer 1

Initial Investment = $140,232
Useful Life = 4 years
Initial Investment in NWC = $2,789

Salvage Value = $6,601

After-tax Salvage Value = $6,601 * (1 - 0.32)
After-tax Salvage Value = $4,488.68

Annual OCF = $22,835
Cost of Capital = 18%

NPV = -$140,232 - $2,789 + $22,835/1.18 + $22,835/1.18^2 + $22,835/1.18^3 + $22,835/1.18^4 + $4,488.68/1.18^4 + $2,789/1.18^4
NPV = -$143,021 + $22,835 * (1 - (1/1.18)^4) / 0.18 + $7,277.68 * (1/1.18)^4
NPV = -$143,021 + $22,835 * 2.690062 + $7,277.68 * 0.515789
NPV = -$77,839.69