Temple Corp. is considering a new project whose data are shown below. The equipm

Question

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a three-year tax life, would be depreciated by the straight-line method over its three-year life, and would be required. Revenues and other operating costs are expected to be constant over the project's three-year life. What is the project's NPV?
Risk -adjusted WACC 10%
Net investment cost (depreciable basis) 65,000
Straight-line depreciation rate 33.33%
Sales revenues, each year 65,000
Operating cost (excl. deprec), each year 25,000
tax rate 35%

Explanation / Answer

WACC 10.0% Years 0 1 2 3 Investment cost -$65,000 Sales revenues $65,500 $65,500 $65,500 - Operating costs (excl. deprec.) 25,000 25,000 25,000 - Depreciation rate = 33.333% 21,667 21,667 21,667 Operating income (EBIT) $18,833 $18,833 $18,833 - Taxes Rate = 35% 6,592 6,592 6,592 After-tax EBIT $12,242 $12,242 $12,242 + Depreciation 21,667 1,667 21,667 Cash flow -$65,000 $33,908 $33,908 $33,908 NPV $19,325

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