Question

Gateway Communications is considering a project with an initial fixed assets cost of $1.56 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $239,000. The project will not change sales but will reduce operating costs by $397,000 per year. The tax rate is 40 percent and the required return is 11.4 percent. The project will require $51,500 in net working capital, which will be recouped when the project ends. What is the project's NPV?

$132,896

$183,710

$177,783

$170,946

$138,937

please show steps thank you !

Answer 1

	Annual depreciation =			=1560000/9
	Annual depreciation =			173333.3333
	Year	0	1	2	3	4	5	6	7	8	9
A	Initial investment	-1560000
B	Working capital	-51500
C	Computation of operating cash flow
D	Post tax saving in cost = 397000*(1-40%)		238200	238200	238200	238200	238200	238200	238200	238200	238200
E	Tax shield on depreciation = 173333.33*40%		69333	69333	69333	69333	69333	69333	69333	69333	69333
F	Post tax salvage value =239000*(1-40%)										143400
G	Release of working capital										51500
H=A+B+C+D+E+F	Total cash flow	-1611500	307533	307533	307533	307533	307533	307533	307533	307533	502433
I	PVIF @ 11.4%	1.0000	0.8977	0.8058	0.7233	0.6493	0.5829	0.5232	0.4697	0.4216	0.3785
J=H*I	present value	(1,611,500)	276,062	247,812	222,452	199,688	179,253	160,909	144,443	129,661	190,157	138,937
	NPV =	138,937
	therefore correct answer is option =	138,937