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

Ans.

Step 1.

Net investment in fixed assets	$       60,000.00
+New working capital	$       10,000.00
=Initial cash outlay at time 0	$       70,000.00

Step 2.

Year	0	1	2	3
Annual sales revenue		$                  75,000.00	$ 75,000.00	$ 75,000.00
Less: Cash operating costs [excluding depreciation]		$                  30,000.00	$ 30,000.00	$ 30,000.00
Less: Depreciation		$                  19,998.00	$ 26,670.00	$    8,886.00
Net operating income		$                  25,002.00	$ 18,330.00	$ 36,114.00
Less: Tax at 35%		$                    8,750.70	$    6,415.50	$ 12,639.90
NOPAT		$                  16,251.30	$ 11,914.50	$ 23,474.10
Add: Depreciation		$                  19,998.00	$ 26,670.00	$    8,886.00
Operating cash flow		$                  36,249.30	$ 38,584.50	$ 32,360.10

Step 3.

Pretax salvage value	$         7,000.00
Book value at end of year 3	$                4,446.00
Gain on sale	$                2,554.00
Tax on sale at 35%	$                   893.90
After tax salvage value (7000 - 893.9)	$                6,106.10
Realization of working capital	$             10,000.00
Terminal non operating cash flow at end of year 3	$             16,106.10

Total Cash Flow at the end of year 3 = $ 32,360.10 + $16,106.10 = $ 48,466.20

Step 4.

Annual project cash flows	$      (70,000.00)	$           36,249.30	$ 38,584.50	$ 48,466.20
PVIF at 14% [PVIF = 1/1.14^t]	1	0.877192982	0.76946753	0.67497152
Present Value @14%	$      (70,000.00)	$           31,797.63	$ 29,689.52	$ 32,713.30
NPV	$       24,200.46