Question

You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 15%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

Answer 1

Initial Investment = $400,000
Salvage Value = $3,000
Useful Life = 12 years

Annual Depreciation = (Initial Investment - Salvage Value) / Useful Life
Annual Depreciation = ($400,000 - $3,000) / 12
Annual Depreciation = $33,083.33

Initial Investment in NWC = $16,000

Annual Operating Cash Flow = (Incremental Revenue - Incremental Expenses) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($90,000 - $8,000) * (1 - 0.40) + 0.40 * $33,083.33
Annual Operating Cash Flow = $82,000 * 0.60 + 0.40 * $33,083.33
Annual Operating Cash Flow = $62,433.332

Cost of Capital = 15%

Net Present Value = -$400,000 - $16,000 + $62,433.332 * PVA of $1 (15%, 12) + $16,000 * PV of $1 (15%, 12) + $3,000 * PV of $1 (15%, 12)
Net Present Value = -$416,000 + $62,433.332 * (1 - (1/1.15)^12) / 0.15 + $19,000 * (1/1.15)^12
Net Present Value = -$416,000 + $62,433.332 * 5.420619 + $19,000 * 0.186907
Net Present Value = -$74,021.46