Question

In: Finance

Net Present Value

NBA stars Kevin Durant and Chris Paul own a company that faces a 40% tax rate and uses a 14% discount rate. They just invested $677,000 in equipment for the banking app “Goalsetter” that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will be salvaged for $182,000 at the end of the project. Kevin Durant and Chris Paul know that the project's operating cash flow will be $165,300 per year. What is the NPV of this project if it requires $52,000 initially for net working capital, which will be recovered at the end of the project?

a. −$15,126

b. −$12,763

c. −$11,486

d. –$13,614

e. −$16,290

Solutions

Expert Solution

Step 1 FORMULA- NET PRESENT VALUE =PRESENT VALUE OF FUTURE CASH FLOWS - INITIAL OUTLAY

GIVEN INITIAL OUTLAY= 677000 +52000= 729000

CASH FLOW EACH YEAR= OPERATING CASHFLOW 

OPERATING CASH FLOW =165300

CASH FLOW FOR YEAR 1= 165300

CASH FLOW FOR YEAR 2= 165300

CASH FLOW FOR YEAR 3= 165300

CASH FLOW FOR YEAR 4= 165300

CASH FLOW FOR YEAR 5= 165300

CASH FLOW FOR YEAR 6= OPERATING CASHFLOW + WORKING CAPITAL RECEIVED BACK+ AFTER TAX SCRAP VALUE OF MACHINE RECEIVED

                                        = 165300+52000+182000(1-40%)

                                        = 326500

 

Step 2 CALCULATION OF PRESENT VALU AT THE THE DISCOUNT RATE I.E 14%

DISCOUNT FACTOR FOR EACH YEAR = 1/(1+r)^n

WHERE r =14

n=1,2,3,4,5,6

YEARS CASH FLOW(A) DISCOUNT FACTOR @ 14%(B) PRESENT VALUE(A*B)
0 -677000-52000 1 -729000
1 165300 0.877 144968
2 165300 0.769 127116
3 165300 0.675 111578
4 165300 0.593 98023
5 165300 0.519 85790
6 326500 0.456 148884
NET PRESENT VALUE   NPV TOTAL -12641=-12763 ROUNDED OFF TO NEAREST ANSWER

 

Step 3 OPTION B -12763 IS CORRECT ANSWER
 

OPTION B -12763 IS CORRECT ANSWER

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