QUESTION 24 Ramos Corporation is considering a new investment whose data are sho

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QUESTION 24 Ramos Corporation is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that woauld be recovered at the end of the projects life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? WACC Net investment in fixed assets (basis) Required net operating working capital Straight-line depreciation rate Annual sales revenues Annual operating costs (excl. depr.) Tax rate 12.0% $75,000 $15,000 33.333% $79,000 $25,000 35.0% O $24,383 25,198 O $24,959 O $25,997 $25,009 QUESTION 25 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answ

Explanation / Answer

Annual depreciation = $75,000/3 = $25,000

Year 0 cash flow = -$75,000 - $15,000 = -$90,000

Year 1 - 3 cash flow

Annual Sales Revenue = $79,000

Less: Annual Operating Costs = -$25,000

Less: Depreciation = -$25,000

EBT = $29,000

Less: Tax(@35%) = -$10,150

Net Income = $18,850

Add: Depreciation = $25,000

Operating Cash Flows = $43,850

Additional Year 3 Cash flow = Recovery of Working Capital = $15,000

NPV = - Year 0 Cash Flow + Year 1 Cash Flow/(1+r)1 + Year 2 Cash Flow/(1+r)2 + Year 3 Cash Flow/(1+r)3

  + Year 3 Additional Cash Flow/(1+r)3

= -$90,000 + $43,850/1.121 + $43,850/1.122 + $43,850/1.123 + $15,000/1.123

= -$90,000 + $39,151.79 + $34,956.95 + $31,211.56 + $10,676.70

= $25,997

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