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In: Finance

18) You are considering investing in a project that increases annual costs $25,000 by per year...

18) You are considering investing in a project that increases annual costs $25,000 by per year over the project's 5 year life . The project has an initial cost of $ 500,000 and will be depreciated straight - line over 5 years Assume a 32 % tax bracket and a discount rate of 11 % . Suppose the equipment is sold at the end of year 5 for $ 300,000 , pretax . What is the NPV ?

a)-$317,,818.44

b)-$455,887.34

c)-$243,667.99

d)-$323,497.47

e)-$356,428.12

Solutions

Expert Solution

d)-$323,497.47

Step-1:Calculation of operating cash flow
Annual cost -25000
Depreciation expense $ -1,00,000.00
Total cost -125000
Tax saving 40000
After tax cost -85000
Depreciation $   1,00,000.00
Operating cash flow $       15,000.00
Working:
Straight Line depreciation = (Cost - Salvage Value)/Useful Life
= (500000-0)/5
= $   1,00,000.00
Step-2:Calculation of NPV
Present value of operating cash flow $       15,000.00 * 3.695897 = $       55,438.46
Present value of after tax sale $   2,04,000.00 * 0.593451 = $   1,21,064.07
Total Present value of cash inflow $   1,76,502.53
Less cost of project $   5,00,000.00
NPV $ -3,23,497.47
Working:
After Tax sale = 300000*(1-0.32)
= $   2,04,000.00
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.11)^-5)/0.11 i 11%
= 3.695897018 n 5
Present value of 1 = (1+i)^-n
= (1+0.11)^-5
= 0.593451328

jeff jeffy answered 6 months ago
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