Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Risk-adjusted WACC 10.0%Net investment cost (depreciable basis) $65,000Straight-line depreciation rate 33.3333%Sales revenues, each year $65,500Annual operating costs (excl. depreciation) $25,000Tax rate 35.0%a. $15,740b. $16,569c. $17,441d. $18,359e. $19,325

Question

Business

Junior Green

13 July, 18:11

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Risk-adjusted WACC 10.0%Net investment cost (depreciable basis) $65,000Straight-line depreciation rate 33.3333%Sales revenues, each year $65,500Annual operating costs (excl. depreciation) $25,000Tax rate 35.0%a. $15,740b. $16,569c. $17,441d. $18,359e. $19,325

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Answers (1)

Know the Answer?

Luke Duncan · Answer 1

NPV = $19325

so correct option is e. $19,325

Explanation:

given data

Risk-adjusted WACC = 10.0%

Net investment cost = $65,000

depreciation rate = 33.3333%

Sales revenues = $65,500

Operating costs = $25,000

Tax rate = 35.0%

solution

we know here EBT that is express as

EBT = sales - depreciation - operating cost

EBT = 65500 - 21666.67 - 25000

EBT = 18833.33

and

tax is 35 % = 35 % of 18833.33 = 6591.67

and

EAT = EBT - tax

EAT = 18833.33 - 6591.67

EAT = 12241.67

and

net cash flow is here = EAt + depreciation adj

net cash flow = 12241.67 + 21666.67

net cash flow = 33908.33

and

NPV = pv cashflow - PV investment

NPV = 84325 - 65000

NPV = $19325

so correct option is e. $19,325