Question

In: Finance

Easy Payment Loan Company is thinking of opening a new office, and the key data are...

Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and clear, and it would sell it for $100,000 after taxes if the company decides not to open the new office. The equipment that would be used would be depreciated by the straight-line method over the project’s 3-year life, and would have a zero salvage value. An extra $5,000 of new working capital would be required to get this project running. Revenues and cash operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1–3 and the increased working capital will be recovered when this project ends. A simplified CCA is for mathematical convenience.)

WACC 10.0%
Net equipment capital cost

$65,000

Annual CCA deduction for equipment

$21,665

Sales revenues, each year

$150,000

Cash operating costs, each year

$25,000

Tax rate 3.5%

A. $50,464
B. $54,672
C. $47,940
D. $55,915

Solutions

Expert Solution

Initial Investment

Current value of the building   = $100,000

(+) Cost of equipment     = $65,000

(+) Net working capital   = $5000

Total initial investment = $170,000

Annual Cash flow

Annual Cash flow = (Sales revenue - Operating cost) x (1- tax rate) + CCA x Tax rate

                              = ($150,000 - $25,000) x (1-0.35) + 21,665 x .35

                              = $88,832.75

NPV

NPV can be calculated using the following formula:

NPV = Annual cash flow x PVIFA(3,10%) + Working capital x PVIF (3,10%) - initial Investment

         = 88372.75 x 2.486852 + 5000 x 0.751315 – 170,000

        = $54672

Therefore, option B is correct.


Related Solutions

Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown...
Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in...
Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown...
Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in...
Crete Logistics is thinking of opening a new warehouse, and the key data are shown below....
Crete Logistics is thinking of opening a new warehouse, and the key data are shown below. The company will be leasing the building at a cost of $2,000 per month. The equipment for the project would be depreciated by the straight-line method over the project's 4-year life to a salvage value of zero, but you estimate the equipment's true salvage value is $10,000. New working capital of $15,000 would be required, and revenues and other operating costs would be constant...
A borrower has a $50000 loan with the "Easy-Credit" Finance Company. The loan is to be...
A borrower has a $50000 loan with the "Easy-Credit" Finance Company. The loan is to be repaid over 14 years via monthly payments at 8.6%/year compounded monthly. Just after the 7th payment, the borrower learns that his local bank would lend him money at 6.6%/year compounded monthly. Assuming that the contract stipulates an early repayment penalty equal to the interest rate differential times the outstanding balance times the term remaining in the standard 5-year guaranteed interest period, what would be...
An Australia mining company, QMC is thinking about opening a new gold mine in South Africa....
An Australia mining company, QMC is thinking about opening a new gold mine in South Africa. The mine is expected to produce 100,000 ounces of gold per year for 5 years. The current price of gold is US$1700 per ounce and the company will hedge its sales at this price for the 5-year period. The mine is expected to cost A$ 100,000,000 to set up and extraction costs are expected to be US$1350 per ounce for the life of the...
kennedy corp is thinking in investing in a new location the managers think that opening a...
kennedy corp is thinking in investing in a new location the managers think that opening a new store will cost 1170. they expect the following years profits 250 in year one, 370 in year 2, in year 3 650, AND 600 IN YEAR 4. THE CURRENT wacc IS 8% WHAT IS THE npV OF THIS INVESTMENT?
Ross Corporation is thinking of opening a new warehouse. The new equipment required has a net...
Ross Corporation is thinking of opening a new warehouse. The new equipment required has a net cost (depreciable basis) of €125,000. In addition, the company owns the building that would be used, and it could sell it for €130,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 4-year life, after which it would be worth nothing and thus it would have a...
FIND:THE FOLLOWING DATA: FOR THE NEW LOAN : ANALYSIS MORTAGE AMOUNT MORTGAGE PAYMENT MONTHS TO RECOVER...
FIND:THE FOLLOWING DATA: FOR THE NEW LOAN : ANALYSIS MORTAGE AMOUNT MORTGAGE PAYMENT MONTHS TO RECOVER REFINANCING COST MORTGAGE BALANCE AT RESALE (PRESENT VALUE) PRINCIPAL REPAID TO RESALE TOTAL PAYMENTS TO RESALE TOTAL INTEREST TO RESALE TAX DEDUCTION ON INTEREST NET INTEREST COST TO RESALE INTEREST SAVINGS (COST) TOTAL SAVINGS COST DATA ON TABLES ....PERSONAL Marginal tax rate 6% Resale Plan (Months) 60 MORTGAGE TERMS Original Mortgage Amount $150,000.00 Current Mortgage Rate 5.75% Original Term (Years) 20 Months Paid 117...
A major dish network chain is considering opening a new office in an area that currently...
A major dish network chain is considering opening a new office in an area that currently does          not have any office to serve residents of that area. The chain will open store only if more than          7,200 of the 24,000 households in the area shows interest to get dish network installation in their          houses. A telephone poll of 625 randomly selected households in the area shows that 425          households are not interested in the dish network installations. Using 95% confidence...
Q19. A major dish network chain is considering opening a new office in an area that...
Q19. A major dish network chain is considering opening a new office in an area that currently does          not have any office to serve residents of that area. The chain will open store only if more than          7,200 of the 24,000 households in the area shows interest to get dish network installation in their          houses. A telephone poll of 625 randomly selected households in the area shows that 425          households are not interested in the dish...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT