Question

A company is considering a 6-year project that requires an initial outlay of $23,000. The project engineer has estimated that the operating cash flows will be $4,000 in year 1, $6,000 in year 2, $7,000 in year 3, $7,000 in year 4, $7,000 in year 5, and $9,000 in year 6. At the end of the project, the equipment will be fully depreciated, classified as 5-year property under MACRS. The project engineer believes the equipment can be sold for $5,000 at the end of the project. If the tax rate is 32% and the required rate of return is 16%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Answer 1

Net Present value $ 1,680

Year	Cash Flow	Discount factor	Present Value
x	a	b=1.16^-x	c=a*b
0	$       -23,000	1.0000	$       -23,000
1	$           4,000	0.8621	$           3,448
2	$           6,000	0.7432	$           4,459
3	$           7,000	0.6407	$           4,485
4	$           7,000	0.5523	$           3,866
5	$           7,000	0.4761	$           3,333
6	$         12,400	0.4104	$           5,089
Net Present Value			$           1,680
Working:
After tax sale proceeds	=	Before tax sale proceeds*(1-Tax rate)
	=	5000*(1-0.32)
	=	$       3,400
Cash flow of year 6	=	Operating cash flow	+	After tax sale of equipment
	=	$       9,000	+	$    3,400
	=	$     12,400