A company is considering a 6-year project that requires an initial outlay of $26

Question

A company is considering a 6-year project that requires an initial outlay of $26,000. The project engineer has estimated that the operating cash flows will be $4,000 in year 1, $6,000 in year 2, $7,000 in year 3, $7,000 in year 4, $7,000 in year 5, and $9,000 in year 6. At the end of the project, the equipment will be fully depreciated, classified as 5-year property under MACRS. The project engineer believes the equipment can be sold for $4,000 at the end of the project. If the tax rate is 30% and the required rate of return is 16%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

Explanation / Answer

Answer:

Discount rate 16% Year 0 1 2 3 4 5 6 Intial cost 26000 Dep 5200 8320 4992 2995.2 2995.2 1497.6 Book value at the end of the Project 0 OCF 4000 6000 7000 7000 7000 9000 After tax gain on sale of equipment 2800 Total cash flow -26000 4000 6000 7000 7000 7000 11800 NPV -1566.10

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