Problem IV Sheridan Films is considering some new equipment whose data are shown

Question

Problem IV Sheridan Films is considering some new equipment whose data are shown below. The equipment has year tax life and would be fully depreciated by the straight line method over 3 years, but would have a positive pretax salvage value at the end of year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's lice. Revenues and operating costs are expected to be constant over the project's 3 year life What is the project NPV? WACC 10% Net investment in fixed assets (depreciable basis) $70.000 Required working capital $10,000 Straight line depreciation rate 33.33% Sales revenues each year $75 ,000 Operating costs (excluding depreciation), each year $30,000 Expected pretax salvage value $5 ,000 Tax rate 40%

Explanation / Answer

inital invst= 70000+10000= 80000

annual CF= (75000-30000-23333.33)x.6 + 23333.33= $36333.33

cash flow in 3rd year= 36333.33+(5000x.6)+10000= $49333.33

NPV= -80000+36333.33/1.1+ 36333.33/1.1^2+49333.33/1.1^3= $20122.71 or $20123

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