Question

Gateway communication is considering a project with an initial fix asset cost of 1.070000 that will be depreciated straight line to zero book value over 10 years over the life of the project. At the end of the project the equipment will be sold for an estimated 228000. The project will not change sales but reduced operating costs by 381500 per year. The tax rate is 34 % and required return is 10.3%. The project will be required NWC 46000 which will be recouped when project end. What is the project NPV?

Answer 1

Answer: Project NPV : $ 705,816.15

Initial investment = Cost of Fixed Asset + NWC = $ 1,070,000 + $ 46,000 = $ 1,116,000

Annual operating cash flows = Annual Savings in Operating Costs x ( 1 - t ) + Annual depreciation x t

= 381,500 x 0.66 + 107,000 x 0.34 = $ 251,790 + $ 36,380 = $ 288,170

After salvage value of the asset = $ 228,000 x 0.66 = $ 150,480

Terminal cash flows = $ 150,480 + $ 46,000 = $ 196,480

PVA_{10.3 %, n=10} = [ { 1 - ( 1 / 1.103) ¹⁰ } / 0.103 ] = 6.0662

PV _{10.3%, n=10} = ( 1 / 1.103) ¹⁰ = 0.3752

NPV = $ 288,170 x 6.0662 + $ 196,480 x 0.3752 - $ 1,116,000 = $ 1,748,096.85 + $ 73,719.30 - $ 1,116,000 = $ 705,816.15