Question
In: Finance
A firm is considering a new project that costs $10,000 that will last 5 years and...
- A firm is considering a new project that costs $10,000 that
will last 5 years and will have no salvage value. The project would
save $3,000 per year in salaries and would be financed with a loan
that will accrue interest costs of 15% per year. The firm’s tax
rate is 40%, its cost of capital is 20%, and the firm will use the
straight-line method of depreciation.
- What is the NPV of the project?
- Should the firm invest in the project?
Solutions
Expert Solution
Answer;
Part a) NPV = ($4,915.96)
Part b) Decision; No, Because NPV is Negative
Explanation;
Depriciation Amount = Initial Investment - Salvage Value / Period
= $10,000 - $0 / 5 years = $2,000
Interest Amount Per Period = Investment Amount x Interest Rate = $10,000 x 15% = $1,500
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