Question

Bart & Simpson Corporation is considering whether to expand its engineering business by manufacturing a new product. The expansion will cost $185,000 and this cost will be depreciated on a straight-line basis over its 6 -year life, and will have a zero salvage value. The sates would be $90,500 a year, with variable costs of $28,300 and fixed costs of $12,900. In addition, the firm anticipates an additional $22,500 in revenue from its existing business if the new product is introduced. The project will require $3,500 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 40 percent? Multiple Choice

A)$42.827
B)$44,600
C)$66.454
D)$41,100

Answer 1

To calculate the NPV, determine the present value of cash flows, deduct the initial investment, and account for taxes.

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to determine the present value of the cash flows and deduct the initial investment. Here's the step-by-step process:

1. Calculate the present value of annual cash flows: $90,500, $28,300, and $12,900 for 6 years. Use the formula:
   `PV = CF / (1+r)^t,`where CF is the cash flow, r is the discount rate, and t is the time period.
2. Add up the present values of the annual cash flows.
3. Calculate the present value of additional revenue: $22,500 for 6 years. Use the same formula as before.
4. Sum up the present values of the cash flows and subtract the initial investment.
5. Multiply the result by (1-tax rate) to account for taxes.

At a discount rate of 12% and a tax rate of 40%, the net present value of the project is $42,827 (option A).