Question

Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it 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 3-year life. What is the project’s NPV? WACC 10.0% Net investment in fixed assets (depreciable basis) $70,000 Required new working capital $10,000 Straight-line deprec. rate 33.333% Sales revenues, each year $75,000 Operating costs (excl. deprec.), each year $30,000 Expected pretax salvage value $5,000 Tax rate 35.0%

do not use excel calculate, plz give step detail

Answer 1

Initial Investment = Net Investment in Fixed Assets + Net working capital required

= $70,000 + $10,000

= $80,000

Depreciation = Investment in fixed assets * Depreciation rate

= $70,000 * 33.333%

= $23,333.1

Profit After Tax = (Sales revenues - Operating Costs - Depreciation) * (1 - tax rate)

= ($75,000 - $30,000 - $23,333.1) * (1 - 35%)

= $21,666.9 * 0.65

= $14,083.485

Net Operating Cash Flows = Profit After Tax + Depreciation

= $14,083.485 + $23,333.1

= $37,416.585

P = Net Operating Cash Flows = $37,416.585

P1 = Recovery of net working capital = $10,000

n = 3 years

r = WACC = 10%

Present Value of Cash Inflows = [P * [1 - (1+r)^-n] / r] + {P1 / (1+r)^n]

= [$37,416.585 * [1 - (1+10%)^-3] / 10%] + [$10,000 / (1+10%)^3]

= [$37,416.585 * 0.248685199 / 0.10] + [$10,000 / 1.331]

= $93,049.508866 + $7,513.148009

= $100,562.65688

Project's NPV = Present value of cash inflows - Initial investment

= $100,562.65688 - $80,000

= $20,562.67

Therefore, Project's NPV is $20,562.67