Question

Thomson Media is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box. WACC 14.0% Net investment in fixed assets (depreciable basis) $60,000 Required new working capital $10,000 Sales revenues, each year $75,000 Operating costs excl. depr'n, each year $30,000 Expected pretax salvage value $7,000 Tax rate 35.0%

Answer 1

	0	1	2	3
Sales revenue		$           75,000	$        75,000	$        75,000
-Operating costs other than depreciation		$           30,000	$        30,000	$        30,000
MACRS Depreciation %		33.33	44.45	14.81	Total Depn	Ending BV
-Depreciation expense [on $135,000]		$           19,998	$        26,670	$           8,886	$       55,554	$           4,446
=NOI		$           25,002	$        18,330	$        36,114
-Tax at 35%		$             9,501	$          6,965	$        13,723
=NOPAT		$           15,501	$        11,365	$        22,391
+Depreciation		$           19,998	$        26,670	$           8,886
=OCF		$           35,499	$        38,035	$        31,277
-Capital expenditure	$           60,000
-Change in NWC	$           10,000	$                    -	$                 -	$       -10,000
After tax salvage value = 7000-(7000-4446)*35% =				$           6,106
FCF	$          -70,000	$           35,499	$        38,035	$        47,383
PVIF at 14%	1	0.87719	0.76947	0.67497
PV at 14%	$          -70,000	$           31,140	$        29,266	$        31,982
NPV	$           22,388