Question

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5.23 million to setup and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.  

Assume that THSI's cost of capital is 9.7% p.a.

Compute the NPV of the temporary housing facility to the nearest dollar. (Do not enter a dollar sign, just enter your answer as a whole number, either positive or negative)

Answer 1

	Information provided
	S.no.		Particulars	Amt in million $
	1		Initial cost of project	5.23
	2		Revenue	20
	3		Operating expenses	12
	4		Depreciation	3
	5		Tax	35%
	6		Cost of capital	9.70%
Calculation of NPV
Year	Cash inflow	Cash ouflow			Profit/Loss	Tax @ 35%	Net cash flow	Discount factor @ 9.70%	PV
	Revenue	Initial cost of project	Operating expenses	Other Depreciation
										a	b	C	d	e	f=c-d-e	g=f X35%	h	i	j=hXi
1	20.00	5.23	12.00	3.00	-0.23	0.00	3.00	1.00	3.00
	Net present value								3.00
Notes
1	Initial cost required to be settled in first year hence it is treated as an expense.
2	As there is loss in project hence no tax liability arised.
3	Only first year of operation hence no impact of discounting have been given.