Gateway Communications is considering a project with an initial fixed assets cos
ID: 2827136 • Letter: G
Question
Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 35 percent and the required return is 10.7 percent. The project will require $48,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?
$133,836
$171,046
$176,748
$164,467
$128,017
Explanation / Answer
$133,836
Working:
a. Calculation of Annual deprceiation Annual depreciation = (Cost - salvage value)/Useful Life = (1740000-0)/10 = $ 1,74,000 b. Calculation of annual cash flow Saving in operating cost $ 3,83,500 Depreciation $ -1,74,000 Profit before tax $ 2,09,500 Tax Expense $ -73,325 Net Profit $ 1,36,175 Depreciation $ 1,74,000 Annual cash flow $ 3,10,175 c. Year Fixed Asset Investment Net Working Capital Investment Annual cash flow Release of net working capital After tax sale of Equipment Total cash flow Discount factor Present Value 0 $ -17,40,000 $ -48,000 $ -17,88,000 1.0000 $ -17,88,000 1 $ 3,10,175 $ 3,10,175 0.9033 $ 2,80,194 2 $ 3,10,175 $ 3,10,175 0.8160 $ 2,53,111 3 $ 3,10,175 $ 3,10,175 0.7372 $ 2,28,646 4 $ 3,10,175 $ 3,10,175 0.6659 $ 2,06,546 5 $ 3,10,175 $ 3,10,175 0.6015 $ 1,86,582 6 $ 3,10,175 $ 3,10,175 0.5434 $ 1,68,547 7 $ 3,10,175 $ 3,10,175 0.4909 $ 1,52,256 8 $ 3,10,175 $ 3,10,175 0.4434 $ 1,37,539 9 $ 3,10,175 $ 3,10,175 0.4006 $ 1,24,245 10 $ 3,10,175 $ 48,000 $ 1,50,800 $ 5,08,975 0.3618 $ 1,84,171 $ 1,33,836 Working: After tax sale of equipment = 232000*(1-0.35) = $ 1,50,800Related Questions
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