2. Sheridan Films is considering some new equipment whose data are shown below.

Question

2. Sheridan Films is considering some new equipment whose data are shown below. The equipment has a 3 year MACRS tax life. It would have a pre tax salvage value at the end of year 3, when the project would be closed down as shown below. Revenues and other operating costs are expected to be constant over the project's 3 year life. What is the project's NPV? WACC 10.00% Net investment in fixxed assets (depreciable basis) $70,000 Required new working capital $10,000 MACRS deprec. Rate .33 .45 .15 .07 Increased sales revenues each year $75,000 Increased operating costs (excl. deprec.) each year $30,000 Expected salvage value $5,000 Tax rate 35.00% 2. Sheridan Films is considering some new equipment whose data are shown below. The equipment has a 3 year MACRS tax life. It would have a pre tax salvage value at the end of year 3, when the project would be closed down as shown below. Revenues and other operating costs are expected to be constant over the project's 3 year life. What is the project's NPV? WACC 10.00% Net investment in fixxed assets (depreciable basis) $70,000 Required new working capital $10,000 MACRS deprec. Rate .33 .45 .15 .07 Increased sales revenues each year $75,000 Increased operating costs (excl. deprec.) each year $30,000 Expected salvage value $5,000 Tax rate 35.00%

Explanation / Answer

Annual operating after tax cash flow (Without considering depreciation) = (75000 - 30000)*(1 - .35) = 29250

NPV = - Cost - Working capital + CF1/(1 + r)^1 + CF2/(1 +r)^2 + CF3/(1 + r)^3 + Depreciation tax saving + Salvage value / (1 + r)^3 + Working capital release / (1 + i)^3

= -70000 - 10000 + 29250/1.10 + 29250/1.10^2 + 29250/1.10^3 + {70000*.33*.35/1.10 + 70000*.45*.35/1.10^2 + 70000*.15*.35/1.10^3} + 5000/1.10^3 + 10000/1.10^3

= 23232.80

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