Question

Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent, and the risk-free rate is 4.8 percent. The company is currently considering a project that will cost $11.79 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.33 million.

  

If the company has a tax rate of 35 percent, what is the net present value of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Net present value

$

Answer 1

Tax rate		35%
Calculation of annual depreciation
Depreciation		Year-1-6
Cost		$ 11,790,000
Dep Rate (1/6= 16.67%)		16.67%
Depreciation	Cost * Dep rate	$    1,965,000
Calculation of annual operating cash flow
		Year-1-6
Contribution		$    3,330,000
Less: Depreciation		$    1,965,000
Profit before tax (PBT)		$    1,365,000
Tax@35%	PBT*Tax rate	$       477,750
Profit After Tax (PAT)	PBT - Tax	$       887,250
Add Depreciation	PAT + Dep	$    1,965,000
Cash Profit after-tax		$    2,852,250
Calculation of NPV
						12.00%
Year		Capital		Operating cash	Annual Cash flow	PV factor	Present values
0		$(11,790,000)			$(11,790,000)	1.0000	$(11,790,000.00)
1				$    2,852,250	$    2,852,250	0.8929	$    2,546,651.79
2				$    2,852,250	$    2,852,250	0.7972	$    2,273,796.24
3				$    2,852,250	$    2,852,250	0.7118	$    2,030,175.21
4				$    2,852,250	$    2,852,250	0.6355	$    1,812,656.44
5				$    2,852,250	$    2,852,250	0.5674	$    1,618,443.25
6				$    2,852,250	$    2,852,250	0.5066	$    1,445,038.62
					Net Present Value		$       (63,238.46)