14 Temple Corp. is considering a new project whose data are shown below. The equ

Question

14

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 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?

                                           

Select one:

a. $16,569

b. $15,740

c. $17,441

d. $18,359

e. $19,325

Project Data Risk-adjusted WACC 10.0% Net investment cost (depreciable basis) $65,000 Straight-line deprec. rate    33.3333% Sales revenues, each year $65,500 Operating costs (excl. deprec.), each year $25,000 Tax rate 35.0%

Explanation / Answer

Present Value of Cash Inflows = {[Sales revenues - Operating Cost] (1-tax) + Tax saving on depreciation }* Cumulative PVF @ 10% for 3 years

= [(65500-25000)(1-0.35) + (21667*0.35)] 2.487

= $84325

NPV = 84325 - 65000 = $19325

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