Question

The Corporation is considering a project which requires an expenditure of $100,000 initially, at t = 0. It will then obtain additional revenues from sales of $150,000 per year for the next two years (t = 1 and t = 2) with expenses of $30,000 per year for operating costs attributed to the project but not including the depreciation of the initial expenditure of the $100,000. The depreciation used is straight-line with zero salvage, meaning an equal amount each year for the two-year life of the project. Masefield's weighted average cost of capital is 12.69% and it is taxed at a 30% rate. What is the net present value for the project?

Answer 1

The net present value (NPV) of the project is $51,915.

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 associated with it. The initial expenditure of $100,000 is not considered in the NPV calculation as it is a sunk cost. The additional revenues of $150,000 per year for the next two years can be discounted using the weighted average cost of capital (WACC). The WACC for the corporation is 12.69% and it is taxed at a 30% rate.

To calculate the present value of the revenues, we use the formula: PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods. In this case, the present values of the revenues for t = 1 and t = 2 are $132,703 and $118,212, respectively.

The net present value (NPV) is calculated by subtracting the initial expenditure from the present value of the revenues. Therefore, the NPV of the project is $51,915.