Gateway Communications is considering a project with an initial fixed asset cost
ID: 2708907 • Letter: G
Question
Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straightline over the 10year life of the project. At the end of the project the equipment will be sold for an estimated salvage of $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 20 percent rate of return? Why or why not? a. No; The NPV is $224,937.49 b. No; The NPV is $156,627.21 c. Yes; The NPV is $251,860.34 d. Yes; The NPV is $387,516.67 e. Yes; The NPV is $466,940.57 please show me the steps. So I can solve it by financial calculator
Explanation / Answer
The Net present Value is calculated as per the below table
Hence NPV of the project is -156,627.21
Therefore the project should not be implemented.
Hecne Answer is B: Nom The NPV is $156,627.21
Fixed Asset -2460000 Invetory -45000 Reduction in Operating Costs 725000 725000 725000 725000 725000 725000 725000 725000 725000 725000 Less Depriciation 216000 216000 216000 216000 216000 216000 216000 216000 216000 216000 Profit Before tax 509000 509000 509000 509000 509000 509000 509000 509000 509000 509000 Less: Tax at 35% 178150 178150 178150 178150 178150 178150 178150 178150 178150 178150 Profit After Tax 330850 330850 330850 330850 330850 330850 330850 330850 330850 330850 Salavge value at end of year 10 300000 Recovery of Inventory 45000 Add Back Depriciation 216000 216000 216000 216000 216000 216000 216000 216000 216000 216000 Total operating Cash flow 546850 546850 546850 546850 546850 546850 546850 546850 546850 891850 Dsicounted at 20% 0.8333333 0.694444 0.578704 0.482253 0.401878 0.334898 0.279082 0.232568 0.193807 0.161506 Dsicounted Cash flow -2505000 455708.33 379756.9 316464.1 263720.1 219766.8 183139 152615.8 127179.8 105983.2 144038.8 Net Present Value -156627.21 Note: Deprication per year will be (2460000 - 300000)/10 = 216000Related Questions
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