Question

Temple Corp is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage life. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?

Risk-adjusted WACC	10.0%
Net investment cost (depreciable basis)	$65,000
Straight-line depr. rate	33.333%
Sales revenues, each year	$71,000
Annual operating costs (excl. depr)	$25,000
Tax rate	35.0%

Group of answer choices

$28,215

$25,393

$25,958

$23,136

Answer 1

Annual Operating cash flow (OCF)

Operating cash flow (OCF) = [(Revenue – Costs) x (1 – Tax rate)] + [Depreciation x Tax rate]

= [($71,000 - $25,000) x (1 – 0.35)] + [($65,000 x 33.333%) x 0.35]

= [$46,000 x 0.65] + [$21,667 x 0.35]

= $29,900 + $7,583

= $37,483

Project’s Net Present Value (NPV)

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	37,483	0.909091	34,075
2	37,483	0.826446	30,978
3	37,483	0.751315	28,162
TOTAL			93,215

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $93,215 - $65,000

= $28,215

Hence, the Project’s Net Present Value (NPV) will be $28,215

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.