Question

Topperton Company has developed a new industrial product. An outlay of $8 million is required for equipment to produce the new product, and additional net working capital of $400,000 is required to support production and marketing. In addition, a one-time $400,000 (before-tax) expense will be incurred the year that the equipment is placed into service. The equipment will be depreciated on a straight-line basis to a zero book value over 6 years. Although the depreciable life is 6 years, the project is expected to have a productive life of 8 years, and it is estimated that the equipment can be sold for $1 million at that time. Revenues minus expenses are expected to be $3 million per year. The cost of capital for this project is 14%, and the relevant tax rate is 30%. What is the NPV of the new product?

$2,956,923

$3,326,891

$3,002,696

None of these

Answer 1

Hello,
Correct answer is Option C - $3,002,696

years	Revenue	Depriciation	PBT	tax	PAT	CFAT	Pv of cashflow
1	3000000	1333333.33	1666667	500000	1166667	2500000	$2,192,982.46
2	3000000	1333333.33	1666667	500000	1166667	2500000	$1,923,668.82
3	3000000	1333333.33	1666667	500000	1166667	2500000	$1,687,428.79
4	3000000	1333333.33	1666667	500000	1166667	2500000	$1,480,200.69
5	3000000	1333333.33	1666667	500000	1166667	2500000	$1,298,421.66
6	3000000	1333333.33	1666667	500000	1166667	2500000	$1,138,966.37
7	3000000	0	3000000	900000	2100000	2100000	$839,238.38
8	3000000	0	3000000	900000	2100000	2100000	$736,174.02
8	Working capital					400000	$140,223.62
8	Salvage Value after tax					700000	$245,391.34
	Outflow						-8000000
	Working capital required at beginning						-280000
	One time expense after tax						-400000
	NPV						$3,002,696.14

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