Temple Corp. is considering a new project whose data are shown below. The equipm
ID: 2714689 • Letter: T
Question
Temple Corp. 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 change in net operating 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 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.3333%
Sales revenues, each year $65,500
Annual operating costs (excl. depreciation) $25,000
Tax rate 35.0%
Show solution.
Explanation / Answer
Computation of the NPV of the project is as follows:
Particulars
Year 0
Year 1-3
Sales value
-65,000
65,500
Less:
Annual operating costs
25,000
Depreciation
65,000*33.33%
21,665
Net income
18,835
Less:
Tax @35%
6,592
Net income
12,243
Add:
Depreciation
21,665
Cash flows for the period
33,908
Discount rate @10%
1
2.4868
Present value of cash flows
-65,000
53,877
Net present value
-11,123
Since, it has negative NPV; the company shall not take up the project.
Particulars
Year 0
Year 1-3
Sales value
-65,000
65,500
Less:
Annual operating costs
25,000
Depreciation
65,000*33.33%
21,665
Net income
18,835
Less:
Tax @35%
6,592
Net income
12,243
Add:
Depreciation
21,665
Cash flows for the period
33,908
Discount rate @10%
1
2.4868
Present value of cash flows
-65,000
53,877
Net present value
-11,123
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