Final answer:
a. The NPV of the project is infinity. b. The annual EVA in a typical year is $182,000. c. The overall project EVA is $182,000.
Step-by-step explanation:
To calculate the project's Net Present Value (NPV), we will use the formula NPV = Cash Flow / (1 + r)^n, where Cash Flow is the annual cash flow, r is the discount rate, and n is the number of periods. Given the cash flows are in perpetuity, the formula simplifies to NPV = Cash Flow / r. Substituting the given values (Cash Flow of $210,000 and r of 0.13), we get NPV = $210,000 / 0.13 = $1,615,384.62. Subtracting the initial investment of $1.4 million from this gives us the project's NPV as $215,384.62.
a. The NPV of the project can be calculated using the formula:
NPV = Cash Flow / (1 + Cost of Capital)^n, where n is the number of years.
NPV = $210,000 / (1 + 0.13)^∞
NPV = $210,000 / 0
NPV = ∞
b. The annual EVA in a typical year can be calculated as:
EVA = Net Operating Profit After Taxes (NOPAT) - (Cost of Capital x Invested Capital)
EVA = NOPAT - (0.13 x $1.4 million)
EVA = NOPAT - $182,000
Since the cash flows are in perpetuity, the NOPAT will be the same every year. Therefore, the annual EVA will be the same every year as well.
c. The overall project EVA will be the same as the annual EVA, as the cash flows are in perpetuity.