Question

In: Finance

A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will...

A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will be depreciated to a $0 book value using a 20-yr straight line depreciation method.

Each year, annual revenue is $60,000 and cost is $10,000.

After 10 years, you will terminate the project. You expect to sell the the fixed assets for $250,000.

The project is financed by 40% equity and 60% debt. The required rate of return on equity is 12% and the borrowing cost is 4%.

Assume the tax rate is 25%.

What is the project's NPV?

Group of answer choices

-51,056

-21,937

29,441

43,662

Solutions

Expert Solution

Wd = Weight od Debt = 60%

We = Weight of Equity = 40%

re = return on equity = 12%

rd = borrowing cost = 4%

t = tax rate = 25%

WACC = [Wd * rd * (1- t)] + [We * re]

= [60% * 4% * (1 - 25%)] + [40% * 12%]

= 1.8% + 4.8%

= 6.6%

Calculation of NPV of the Project
Particulars 0 1 2 3 4 5 6 7 8 9 10
Initial Investment
Cost of Fixed Assets (A) -400000
Operating Cash Flows
Annual Revenue (B) 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000
Costs (C ) 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000
Depreciation (D)
$400,000 / 20 years		 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000
Profit beforetax (E = B-C-D) 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000
Tax @25% (F = E*25%) 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500
Profit After Tax (G = E-F) 22500 22500 22500 22500 22500 22500 22500 22500 22500 22500
Add back Depreciation (H = D) 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000
Net Operating Cash Flows (I = G+H) 42500 42500 42500 42500 42500 42500 42500 42500 42500 42500
Terminal Value
Sale Value (J) 250000
Unclaimed Depreciation (K)
$20,000 * 10 years		 200000
Profit on sale (L = J-K) 50000
Tax @25% (M = L*25%) 12500
After tax sale Value (N = J-M) 237500
Total Cash Flows (O = A+I+N) -400000 42500 42500 42500 42500 42500 42500 42500 42500 42500 280000
Discount Factor @6.6% (P)
1/(1+6.6%)^n n=0,1,2,3,4,5,6,7,8,9,10		 1 0.938086304 0.880005914 0.825521495 0.774410408 0.726463797 0.681485739 0.639292438 0.59971148 0.562581126 0.527749649
Discounted Cash Flows (Q = O*P) -400000 39868.66792 37400.25133 35084.66354 32912.44234 30874.71139 28963.14389 27169.92861 25487.7379 23909.69785 147769.9017
Net Present Value 29441.14647

Therefore, NPV of the Project is $29,441

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will...
A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will be depreciated to a $0 book value using a 20-yr straight line depreciation method. Each year, annual revenue is $60,000 and cost is $10,000. After 10 years, you will terminate the project. You expect to sell the the fixed assets for $250,000. The project is financed by 40% equity and 60% debt. The required rate of return on equity is 7% and the borrowing...
A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will...
A 10-yr project has an initial cost of $400,000 for fixed assets. The fixed assets will be depreciated to a $0 book value using a 20-yr straight line depreciation method. Each year, annual revenue is $50,000 and cost is $15,000. After 10 years, you will terminate the project. You expect to sell the the fixed assets for $250,000. The project is financed by 40% equity and 60% debt. The required rate of return on equity is 12% and the borrowing...
A 10-yr project has an initial cost of $500,000 for fixed assets. The fixed assets will...
A 10-yr project has an initial cost of $500,000 for fixed assets. The fixed assets will be depreciated to a $0 book value using a 20-yr straight line depreciation method. Each year, annual revenue is $50,000 and cost is $15,000. After 10 years, you will terminate the project. You expect to sell the the fixed assets for $350,000. The project is financed by 40% equity and 60% debt. The required rate of return on equity is 7% and the borrowing...
Gateway Communications is considering a project with an initial fixed assets cost of $1.76 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.76 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $234,000. The project will not change sales but will reduce operating costs by $384,500 per year. The tax rate is 34 percent and the required return is 10.9 percent. The project will require $49,000...
Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 35 percent and the required return is 10.7 percent. The project will require $48,000...
Gateway Communications is considering a project with an initial fixed assets cost of $1.63 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.63 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $233,000. The project will not change sales but will reduce operating costs by $384,000 per year. The tax rate is 40 percent and the required return is 10.8 percent. The project will require $48,500...
Gateway Communications is considering a project with an initial fixed assets cost of $1.59 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.59 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $236,000. The project will not change sales but will reduce operating costs by $385,500 per year. The tax rate is 40 percent and the required return is 11.1 percent. The project will require $50,000...
Gateway Communications is considering a project with an initial fixed assets cost of $1.59 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.59 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $236,000. The project will not change sales but will reduce operating costs by $385,500 per year. The tax rate is 21 percent and the required return is 11.1 percent. The project will require $50,000...
Gateway Communications is considering a project with an initial fixed assets cost of $1.69 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.69 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $230,000. The project will not change sales but will reduce operating costs by $382,500 per year. The tax rate is 40 percent and the required return is 10.5 percent. The project will require $47,000...
Gateway Communications is considering a project with an initial fixed assets cost of $1.56 million that...
Gateway Communications is considering a project with an initial fixed assets cost of $1.56 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $239,000. The project will not change sales but will reduce operating costs by $397,000 per year. The tax rate is 40 percent and the required return is 11.4 percent. The project will require $51,500...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT