Question

javacity is considering new brewing equipment. the amount of initial investment will be $550 today and the equipment is expected to last for 10 years with no salvage value. the depreciable base is the entire amount of investment, and straight line depreciation will be used. project inflows are expected to be $540 per year and project outflows are expected to be $315 per year, both starting in one year and continuing at the end of each year over the project life. javacity pays tax at the rate of 30%. what is the net present value of the project if the required rate of return is 6%.

Answer 1

The net present value (NPV) of the project can be calculated as the present value of the cash inflows minus the present value of the cash outflows, discounted at the required rate of return.

First, we need to calculate the annual depreciation expense:

Depreciation expense = Initial investment / Useful life

Depreciation expense = $550 / 10

Depreciation expense = $55 per year

Next, we can calculate the annual taxable income:

Taxable income = Inflows - Outflows - Depreciation expense

Taxable income = $540 - $315 - $55

Taxable income = $170

The tax payable will be 30% of the taxable income:

Tax payable = Tax rate * Taxable income

Tax payable = 0.3 * $170

Tax payable = $51

The after-tax cash flow for each year will be:

After-tax cash flow = Inflows - Outflows - Tax payable

After-tax cash flow = $540 - $315 - $51

After-tax cash flow = $174

Using the formula for the present value of an annuity, we can calculate the present value of the after-tax cash flows:

PV = C * [(1 - (1 + r)^(-n)) / r]

where:

C = annual cash flow

r = required rate of return

n = number of years

PV = $174 * [(1 - (1 + 0.06)^(-10)) / 0.06]

PV = $1,401.33

The present value of the initial investment is simply the initial investment itself, since it occurs at time zero:

PV of initial investment = -$550

Therefore, the net present value of the project is:

NPV = PV of inflows - PV of outflows

NPV = $1,401.33 - $550

NPV = $851.33

So, the net present value of the project is $851.33 when the required rate of return is 6%.