Given the following information, calculate the NPV of a proposed project: Cost =

Question

Given the following information, calculate the NPV of a proposed project: Cost = $4,000; estimated life = 3 years; initial decrease in accounts receivable = $1000, which must be restored at the end of the project's life; estimated salvage value = $1,000; net income before taxes and depreciation = $2,000 per year; method of depreciation = MACRS; tax rate = 40 percent; required rate of return = 18 percent. (MACRS Table Required on this Problem)

Explanation / Answer

0 1 2 3 cost -4000 A/R -1000 Total Cost -5000 Earnings 2000 2000 2000 Tax @ 40% 800 800 800 Depreciation 1333.2 1800 600 Depreciation Effect 533.28 720 240 Pos Cash Flow 1733.28 1920 1440 Pos Cash Flow 1733.28 1920 1440 Add back A/R 1000 Salvage, After Tax 600 Discount factor @ 18% 0.862 0.743 0.641 Discounted CF -5000 1494.2 1426.9 1947.6 Summary -5000 1494.2 1426.9 1947.6 NPV -> -131.3210054 At 13% cost of capital , I get ~$144, which is only $7 off of (C). Could it be 13% and not 18%?

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