Question

Genoa Company is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV?

WACC	15.50%
Net investment in fixed assets (basis)	$75,000
Required net operating working capital	$41,000
Straight-line depreciation rate	33.333%
Annual sales revenues	$79,000
Annual operating costs (excl. depr.)	$25,000
Tax rate	35.0%

		$9,319
		$9,986
		$8,845
		$9,616
		$9,905

Answer 1

Correct answer is $9905

Cash flows as under

Year	Initial cost	Working capital	Net revenues after tax	Tax saving on depreciation	Net Cash flows
0	($75,000.00)	($41,000.00)			($116,000.00)
1			$35,100.00	$8,750.00	$43,850.00
2			$35,100.00	$8,750.00	$43,850.00
3		41000	$35,100.00	$8,750.00	$84,850.00

Calculations in the excel below