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%

Group of answer choices

-$7,631

-$6,089

-$7,246

-$6,166

-$7,708

Answer 1

Answer is: -$7,708

Particulars	Year 0	Year 1	Year 2	Year 3
Annual Sales Revenues	-	56,000	56,000	56,000
Less: Annual Operating costs	-	30,000	30,000	30,000
Less: Depreciation	-	23,333.10	23,333.10	23,333.10
Operating Income	-	2,666.90	2,666.90	2,666.90
Less: Tax at 35%	-	933.42	933.42	933.42
Income after tax	-	1,733.49	1,733.49	1,733.49
Add back Depreciation	-	23,333.10	23,333.10	23,333.10
Cash flow from operations	-	$25,067	$25,067	$25,067
Initial Investment	-$70,000	-	-	-
Investment in Net working Capital	-$10,000	-	-	10,000
After tax salvage value (1-Tax rate)	$0	-	-	3,250
Net Cash flow	-$80,000	25,067	25,067	38,317
Discount Factor	$1	0.90909	0.82645	0.75131
Discounted Cash flow	-$80,000	$22,788	$20,716	$28,788
NPV =	-$7,708

Excel formulas:

Discount factor formula, if not using excel:

Where,
i = rate of return
n = number of periods