Question

Blue Eagle Technology is considering a project that would last for 2 years. The project would involve an initial investment of 92,000 dollars for new equipment that would be sold for an expected price of 78,000 dollars at the end of the project in 2 years. The equipment would be depreciated to 20,000 dollars over 4 years using straight-line depreciation. In years 1 and 2, relevant annual revenue for the project is expected to be 80,000 dollars per year and relevant annual costs for the project are expected to be 23,000 dollars per year. The tax rate is 50 percent and the cost of capital for the project is 8.32 percent. What is the net present value of the project?

Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 250,000 dollars today. The equipment would be depreciated straight-line to 30,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 43,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 176,000 dollars and relevant costs are expected to be 79,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 9.89 percent. What is the NPV of the project?

Answer 1

Time line		0	1	2
Cost of new machine		-92000
=Initial Investment outlay		-92000
					100.00%	0.00%
Sales			80000	80000
Profits	Sales-variable cost		57000	57000
-Depreciation	(Cost of equipment-salvage value)/no. of years		-18000	-18000	56000	=Salvage Value
=Pretax cash flows			39000	39000
-taxes	=(Pretax cash flows)*(1-tax)		19500	19500
+Depreciation			18000	18000
=after tax operating cash flow			37500	37500
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)			39000
+Tax shield on salvage book value	=Salvage value * tax rate			28000
=Terminal year after tax cash flows				67000
Total Cash flow for the period		-92000	37500	104500
Discount factor=	(1+discount rate)^corresponding period	1	1.0832	1.17332224
Discounted CF=	Cashflow/discount factor	-92000	34619.645	89063.3421
NPV=	Sum of discounted CF=	31682.9875

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