12. Temple is considering a new project whose data are shown below. The equipmen

Question

12. Temple is considering a new project whose data are shown below. The equipment that would be
used has a 3-year tax life, would be depreciated by the straight line method over its 3-year life, and would
have a zero salvage value. No new working capital would be required. Revenues and other operating
costs are expected to be constant over the project's 3-year life. What is the project's NPV?
Risk-adjusted WACC 12.00%
Net investment cost (depreciable basis) $60,000.00
Sales revenues, each year $64,000.00
Cash operating costs, each year $32,000.00
Marginal tax rate 34.00%

Explanation / Answer

Using Excel to assist us in solving for NPV:

We then use Excel’s NPV function and fill in the cost of capital and annual cash flows, and Excel does the rest:

Use the command =NPV(interest rate, year 1 cash flow, year 2 cash flow .... year 4 cash flow) + year 0 cash flow. Note, you do not include the yeat 0 cash flow into the NPV command bracket, but outside it as the NPV command only computes the NPV from year 1 onwards!

For this case the command is =NPV(0.12,19200,19200,19200) + (-60000)

Tax Rate 40% WACC 12% Year 0 Year 1 Year 2 Year 3 Revenue 64000 64000 64000 Cost 32000 32000 32000 Tax -12800 -12800 -12800 Net Cash Flow -60000 19200 19200 19200 NPV -$13,884.84

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