Question

Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 35 percent and the required return is 10.7 percent. The project will require $48,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

$133,836

$171,046

$176,748

$164,467

$128,017

Answer 1

$133,836

Working:

a.	Calculation of Annual deprceiation
	Annual depreciation			=	(Cost - salvage value)/Useful Life
				=	(1740000-0)/10
				=	$       1,74,000
b.	Calculation of annual cash flow
	Saving in operating cost				$       3,83,500
	Depreciation				$     -1,74,000
	Profit before tax				$       2,09,500
	Tax Expense				$         -73,325
	Net Profit				$       1,36,175
	Depreciation				$       1,74,000
	Annual cash flow				$       3,10,175
c.	Year	Fixed Asset Investment	Net Working Capital Investment	Annual cash flow	Release of net working capital	After tax sale of Equipment	Total cash flow	Discount factor	Present Value
	0	$          -17,40,000	$                    -48,000				$ -17,88,000	1.0000	$       -17,88,000
	1			$ 3,10,175			$     3,10,175	0.9033	$           2,80,194
	2			$ 3,10,175			$     3,10,175	0.8160	$           2,53,111
	3			$ 3,10,175			$     3,10,175	0.7372	$           2,28,646
	4			$ 3,10,175			$     3,10,175	0.6659	$           2,06,546
	5			$ 3,10,175			$     3,10,175	0.6015	$           1,86,582
	6			$ 3,10,175			$     3,10,175	0.5434	$           1,68,547
	7			$ 3,10,175			$     3,10,175	0.4909	$           1,52,256
	8			$ 3,10,175			$     3,10,175	0.4434	$           1,37,539
	9			$ 3,10,175			$     3,10,175	0.4006	$           1,24,245
	10			$ 3,10,175	$           48,000	$    1,50,800	$     5,08,975	0.3618	$           1,84,171
									$           1,33,836
	Working:
		After tax sale of equipment		=	232000*(1-0.35)
				=	$       1,50,800