Question

Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment’s estimated salvage value at the end of the project is $9,000. The equipment’s $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The company’s marginal tax rate is 30%.

Calculate the project’s net present value using a 12% discount rate.

Hint:

Net initial investment = ??

Net cash flow for year 1 ~ 9 = ??

Net cash flow for year 10 = ??

Net present value for the project = ??

Answer 1