Question

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 4-year tax life, would be depreciated by the straight-line method over its 4-year life, and would have a zero salvage value. At the end of the project, the equipment would be sold for $8,000 cash. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 4-year life. What is the project’s NPV?

Discount rate 10.0%

investment cost $65,000

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year           $25,000

Tax rate 30.0%

Ans:

Cash flow in Capital investment at Year 0 = $

Cash flow in Capital investment at Year 4 = $

OCF for Year 1 = $

OCF for Year 2 = $

OCF for Year 3 = $

OCF for Year 4 = $

Total CF for Year 0 = $

Total CF for Year 1 = $

Total CF for Year 2 = $

Total CF for Year 3 = $

Total CF for Year 4 = $    

NPV for the project = $

Answer 1

Temple Corp. is considering a new project whose data are shown below.

*The equipment that would be used has a 4-year tax life, would be depreciated by the straight-line method over its 4-year life, and would have a zero salvage value.

* At the end of the project, the equipment would be sold for $8,000 cash.

*No new working capital would be required.

*Revenues and other operating costs are expected to be constant over the project’s 4-year life.

Discount rate 10.0%

investment cost $65,000

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year           $25,000

Tax rate 30%

What is the project’s NPV?   = $44144

Depreciation tax shield = Depreciation exp . * tax rate

Depreciation expenses ( under straight line over 4 years)

Depreciation expenses = Equip. Cost / useful tax life

Depreciation expenses = 65000 / 4 = 16250

Depreciation tax shield = 16250 * 30% = 4875 ( each 4 years same )

Net proceeds from sale of equip. At end of 4 yea

Sales value = 8000 (inflow)

Book value at end = 0 ( because fully depreciated)

Taxable gain = 8000

Tax on gain = 8000 * 30% = 2400 (outflow)

Net proceeds from sale = 8000 - 2400 = 5600 ( inflow)

Years	0	1	2	3	4
Initial investment	(65000)
Sales revenues		65500	65500	65500	65500
-Operating costs (excl. deprec.),		25000	25000	25000	25000
= Earning before tax(excl. deprec.)		40500	40500	40500	40500
- Tax expenses @30%		12150	12150	12150	12150
= Earning After Tax (excl. deprec.)		28350	28350	28350	28350
+ depreciation tax shield ( calculation is above)		4875	4875	4875	4875
= incremental operating cash flow		33225	33225	33225	33225
Net proceeds from sale of equip. At end of 4 year (calculation is above)					5600
Project’s CF	(65000)	33225	33225	33225	38825
PV of $1 factor @ 10%	1	(1/1+10%)^1 = 0.90909	=0.8264	=0.7513	=0.683
PV of CF	(65000)	30204.54	27458.68	24962.4	26518

NPV = PV of cash flow - Initial investment

NPV = ( 30204.54 + 27458.68 + 24962.4 + 26518 ) - 65000

NPV = 109143.65 - 65000 =   $44143.65