Question

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections:

Year	0	1	2	3
Sales (Revenues in $)	​	100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)	​	50,000	50,000	50,000
- Depreciation	​	30,000	30,000	30,000
= EBIT	​	20,000	20,000	20,000
- Taxes (21%)	​	4200	4200	4200
= Unlevered Net Income	​	15,800	15,800	15,800
+ Depreciation	​	30,000	30,000	30,000
+ Changes to Working Capital	​	-5000	-5000	10,000
- Capital Expenditures	-90,000	​	​	​

The NPV for Epiphany's Project is closest to:

Group of answer choices

$4825.

$18,671.

$39,000.

$20,400.

Answer 1

	Epiphany Industries
	Cash flow statement.
	Particulars	Year 0	Year 1	Year 2	Year 3
	Sales		100,000	100,000	100,000
	Less Cost of Goods Sold		50,000	50,000	50,000
	less Depreciation		30,000	30,000	30,000
	EBIT		20,000	20,000	20,000
	Less Taxes 21%		4,200	4,200	4,200
a	=Unlevered Income		15,800	15,800	15,800
b	Add : Depreciation		30,000	30,000	30,000
c	+Changes in working capital		(5,000)	(5,000)	10,000
d	-Capital Expenditure	(90,000)
e	Total Free Cash flow from project =a+b+c+d	(90,000)	40,800	40,800	55,800
f	PV factor @12% =1/1.12^n	1	0.8929	0.7972	0.7118
g	PV of FCF =e*f=	(90,000)	36,429	32,526	39,717
h	Sum of PV of FCF =NPV =	18,671
	So NPV for the project is closest to $18,671
	The second option $18,671 is correct.