What is the NPV of the project? Project life: 3 years Equipment: Cost: $18,000 Economic life:...

What is the NPV of the project? Project life: 3 years Equipment: Cost: $18,000 Economic life: 3 years Salvage value: $4,000 Initial investment in net working capital: $2,000 Revenue: $13,000 in year 1, with a nominal growth rate of 5% per year Fixed cost: $3,000 in year 1 Variable cost: 30% of revenue Corporate tax rate (T): 40% WACC for the project: 10% This project does not create incidental effect.

Expert Solution

The oprrating cash flows are

Year	Revenue	Fixed cost	Variable cost	Net Revenue	Tax	Revenue after tax
0
1	$ 13,000.00	-3000	$ (3,900.00)	$ 6,100.00	-2440	$ 3,660.00
2	$ 13,650.00		$ (4,095.00)	$ 9,555.00	-3822	$ 5,733.00
3	$ 14,332.50		$ (4,299.75)	$ 10,032.75	-4013.1	$ 6,019.65

TheNet cash flows are

Year	Initial cost	Salvage	Working capital	Revenue after tax	Net Cash flow
0	(18,000.00)		(2,000.00)		(20,000.00)
1				$ 3,660.00	3,660.00
2				$ 5,733.00	5,733.00
3		4,000.00	2,000.00	$ 6,019.65	12,019.65

The NPV = - $ 2904.17

jeff jeffy answered 2 years ago

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