Temporary Housing Services Incorporated (THSI) is considering a project that inv

Question

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6.12 million to setup 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. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Assume that THSI's cost of capital is 17.4% p.a. Compute the NPV of the temporary housing facility to the nearest dollar. (Do not enter a dollar sign, just enter your answer as a whole number, either positive or negative)

Explanation / Answer

SL # Particular Amt i Revenue 20.00 million ii Operating expenses 12.00 million iii depreciation expense 3.00 million iv=i-ii-iii Profit before tax 5.00 million v=iv*35% Tax @35% 1.75 million vi=iv-v Profit after tax 3.25 million vii=vi+iii Cash flow for the year 6.25 million viii Present value 5.32 million =6.25/1.172 ix Initial investment $6.12 million x=viii-ix Net present value -0.80 million Assumption : Allowed depreciation is only $3million initial investment is made at beginning of the period All other expenses and cash received at the end of the year

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