Question

Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.

WACC

10.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required net operating working capital

$10,000

Straight-line depreciation rate

33.333%

Annual sales revenues

$56,000

Annual operating costs (excl. depreciation)

$30,000

Expected pre-tax salvage value

$5,000

Tax rate

35.0%

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Answer 1

Based on the given data,pls find below steps, workings and NPV;

The NPV of the Project is negative $ 7707.99 or -ve $ 7708 and this project is not recommended;

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;