Question

avaCity is considering new brewing equipment. The amount of initial investment will be $500 today and the equipment is expected to last for 5 years with no salvage value. The depreciable base is the entire amount of investment, and straight line depreciation will be used. Project inflows are expected to be $530 per year and project outflows are expected to be $320 per year, both starting in one year and continuing at the end of each year over the project life. JavaCity pays tax at the rate of 30%. What is the net present value of the project if the required rate of return is 7%.

Answer 1

	Year	0	1	2	3	4	5
i	Initial investment	-500
ii	Sales		530	530	530	530	530
iii	Cost		-320	-320	-320	-320	-320
iv	Depreciation		-100	-100	-100	-100	-100
v	Profit before tax		110	110	110	110	110
vi	Tax @ 30%		-33	-33	-33	-33	-33
vii	Net income		77	77	77	77	77
viii=vii-iv	Operating cash flow	177	177	177	177	177
ix=i+viii	Net cash flow	-500	177	177	177	177	177
x	PVIF @ 7%	1	0.934579	0.873439	0.816298	0.762895	0.712986
xi=ix*x	Present value	(500.00)	165.42	154.60	144.48	135.03	126.20	225.73
NPV =		225.73