In: Finance
Moore Media is considering some new equipment whose data are
shown below. The equipment has a 3-year tax life and would be fully
depreciated (to zero net book value) by the straight-line method
over 3 years, but it would have a positive pre-tax salvage value at
the end of Year 3, when the project would be closed down. Also,
additional net operating working capital would be required, but it
would be recovered at the end of the project's life. Revenues and
other operating costs are expected to be constant over the
project's 3-year life. What is the project's NPV?
Do not round the intermediate calculations and round the final
answer to the nearest whole number.
WACC |
10.0% |
Net investment in fixed assets (depreciable basis) |
$70,000 |
Required net operating working capital |
$10,000 |
Straight-line depreciation rate |
33.333% |
Annual sales revenues |
$57,000 |
Annual operating costs (excl. depreciation) |
$30,000 |
Expected pre-tax salvage value |
$5,000 |
Tax rate |
35.0% |
Calculation of Project's NPV | ||||
Particulars | 0 | 1 | 2 | 3 |
Initial Investment | ||||
Investment in Fixed Assets | -70000 | |||
Investment in net working capital | -10000 | |||
Net Investment (A) | -80000 | |||
Operating Cash Flows | ||||
Annual Sales (B) | 57000 | 57000 | 57000 | |
Annual Operating Costs (C ) | 30000 | 30000 | 30000 | |
Depreciaiton (D = $70,000 *33.333%) | 23333.1 | 23333.1 | 23333.1 | |
Profit Before Tax (E = B-C-D) | 3666.9 | 3666.9 | 3666.9 | |
Tax @35% (F = E*35%) | 1283.415 | 1283.415 | 1283.415 | |
Profit After Tax (G = E-F) | 2383.485 | 2383.485 | 2383.485 | |
Add back Depreciation (H = D) | 23333.1 | 23333.1 | 23333.1 | |
Net Operating Cash Flows (I = G+H) | 25716.585 | 25716.585 | 25716.585 | |
Terminal Value | ||||
Pre tax salvage value (J) | 5000 | |||
Tax @35% (K = J*35%) | 1750 | |||
After tax salvage Value (L = J-K) | 3250 | |||
Recovery of net working capital (M) | 10000 | |||
Net Terminal Value (N = L+M) | 13250 | |||
Total Cash Flows (O = A+I+N) | -80000 | 25716.585 | 25716.585 | 38966.585 |
Discount Factor @10% (P) 1/(1+10%)^n n=0,1,2,3 |
1 | 0.909090909 | 0.826446281 | 0.751314801 |
Discounted cash Flows (Q = O*P) | -80000 | 23378.71364 | 21253.37603 | 29276.17205 |
NPV of the Project | -6091.738279 | |||
Therefore, project's NPV is -$6,092 |