4. Thomson Media is considering some new equipment whose data are shown below. T

Question

4. Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax 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%u2019s life. Revenues and other operating costs are expected to be constant over the project%u2019s 3-year life. What is the project%u2019s NPV?

WACC 10.0%

Net investment in fixed assets (depreciable basis) $70,000

Required new working capital $10,000

Straight-line deprec. rate 33.333%

Sales revenues, each year $75,000

Operating costs (excl. deprec.), each year $30,000

Expected pretax salvage value $5,000

Tax rate 35.0%

Explanation / Answer

NPV = (75000-30000)*0.65 * PVIFA(10%,3) + 23333.33*0.35 * PVIFA(10%,3) + (5000*0.65+10000)/1.1^3 - 70000-10000

NPV = 29250*2.4869 +8166.67*2.4869 + 9954.92 -80000 = $23006.44

NPV = $23006 (approx)

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