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

NPV of the project is calculated as follows

NPV = Present value of all cash inflows - Present value of cash outflows

Year	Cash flow	Discounting factor at 8.6%	Present value of cash flow @ 8.6%
0	(1,40,000)	1.00	(1,40,000)
1	42,040	0.92	38,710.87
2	42,040	0.85	35,645.36
3	42,040	0.78	32,822.62
4	42,040	0.72	30,223.41
5	42,040	0.66	27,830.02
NPV	25,232.28

NPV of the project is $25,232.28

Working Notes

Working Note 1 :Calculation of annual cash flow from project

Particulars	Amount
Cash sales revenue	71,000
Annual cash operating cost	25,000
Depreciation	28,000
Earnings before tax	18,000
Tax @22%	3,960
Net Income	14,040
Add: Depreciation	28,000
Cash flow from the Project	42,040

Working note 2 : Calculation of annual depreciation

Depreciation = Cost of asset x percentage of depreciation

Depreciation = 140,000 x 20%

Depreciation =28,000 per annum