Question

Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in net operating working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Opportunity cost $100,000 Net equipment cost (depreciable basis) $65,000 Straight-line depr. rate for equipment 33.333% Annual sales revenues $150,000 Annual operating costs (excl. depr.) $25,000 Tax rate 35% a. 054,238 b. 061,507 c. 043,614 d. 048,087 e. 55,915

Answer 1

Depreciation is calculated as 65000/3. Tax rate is at 25% of ebit. Fcff is ebit (1-taxrate)+depreciation-working capital changes.

	Year1	Year 2	Year 3
Revenue	150000	150000	150000
Costs	25000	25000	25000
EBIDTA	125000	125000	125000
Depreciation	21666.7	21666.7	21666.7
Ebit	103333.3	103333.3	103333.3
Tax	25833.3	25833.3	25833.3
Pat	77500	77500	77500
Fcff	99166.7	99166.7	99166.7
Pv	fcff/1.1^1=90151.52	fcff/1.1^2=81955.92	fcff/1.1^3=74505.38
Sum of pv	246612.82
Npv	246,612.82-100,000= 146,612.82