Estimate the NPV for the following project: Project life: 2 years Equipment: Cos

Question

Estimate the NPV for the following project: Project life: 2 years Equipment: Cost: $10,000 Economic life: 2 years Salvage value: $2,000 Initial investment in net working capital: $1,500 Revenue: $15,000 in year 1, with a nominal growth rate of 5% per year Fixed cost $2,000 in year 1, with a nominal growth rate of 5% per year Variable cost: 30% of revenue Marginal corporate tax rate: 40% WACC (Weighted Average Cost of Capital): 10% The revenue, NWC, and operating costs include incidental effects, if any. Select one: O a. $3,948.12 b, $3,225.21 c. $4,238.65 O d. $4,523.56

Explanation / Answer

Answer : $ 3,225.21

Workings:

Period 0 1 2 Cost of Equipment (10,000) Initial Working Capital (1,500) Revenue 15,000 15,750 Variable Costs (4,500) (4,725) Fixed Costs (2,000) (2,100) EBITDA 8,500 8,925 Depreciation 4,000 4,000 Operating Cash Flows after Taxes 6,700 6,955 Recovery of Working Capital 1,500 Salvage Value 2,000 Net Cash Flows (11,500) 6,700 10,455 PV factor at 10% 1.00000 0.90909 0.82645 Present Values (11,500) 6,090.90 8,640.53 Net Present Value ( NPV) 3,231.43

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