Temporary Housing Services (THS) is considering a project that involves setting

Question

Temporary Housing Services (THS) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a cyclone. THS will lease space in this facility to various agencies and groups providing relief services to the area. THS estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THS will require no working capital for this investment. THS's marginal tax rate is 30%. Assume that THS's cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to:

Explanation / Answer

FCF = (revenue-expenses-depreciation)*(1-tax rate) +depreciation

        =(20-12-3) *(1.35)=3

        =3.25+3

      = 6.25

Cost of capital is 15%

PV of 6.25 (R 15%) = 5.434

NPV: 5 - 5.434 = .12, or- 0.434

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