Question

Cookie Cutter Corp. is considering a new project whose data are shown below. The equipment that would be used has a 5-year tax life, would be depreciated by the straight-line method over its 5-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 5-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the second decimal place.

• Risk-adjusted WACC = 8.6%
• Net investment cost (depreciable basis) = $140,000
• Straight-line depreciation rate = 20.00% per year
• Cash Sales revenues, each year = $71,000
• Annual cash operating costs (excluding depreciation) = $25,000
• Tax rate = 22.0%

Answer 1

Calculation of Project's NPV
Particulars	0	1	2	3	4	5
Initial Investment
Net Investment (A)	-140000
Operating Cash Flows
Annual Sales Revenue (B)		71000	71000	71000	71000	71000
Annual Operating Costs (C )		25000	25000	25000	25000	25000
Depreciation (D = $140,000 * 20%)		28000	28000	28000	28000	28000
Profit Before Tax (E = B-C-D)		18000	18000	18000	18000	18000
Tax @22% (F = E*22%)		3960	3960	3960	3960	3960
Profit After Tax (G = E-F)		14040	14040	14040	14040	14040
Add back Depreciation (H = D)		28000	28000	28000	28000	28000
Net Operating Cash Flows (I = G+H)		42040	42040	42040	42040	42040
Total Cash Flows (J = A+I)	-140000	42040	42040	42040	42040	42040
Discount Factor @8.6% (K) 1/(1+8.6%)^n n=0,1,2,3,4,5	1	0.920810313	0.847891633	0.78074736	0.718920221	0.661989154
Discounted Cash Flows (L = J*K)	-140000	38710.86556	35645.36424	32822.619	30223.40608	27830.02401
NPV of the Project	25232.2789
Therefore, Project's NPV is $25,232.28