Question

Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent, and the risk-free rate is 4.2 percent. The company is currently considering a project that will cost $11.61 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.27 million. If the company has a tax rate of 40 percent, what is the net present value of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$-361,190

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

We need to determine cash flows

Cash flow = (revenue - cost - depreciation) (1 - tax rate) + depreciation

3.27 - 1.935) ( 1 - 0.4) + 1.935 = 2.736

Cash flow in year 0 = 11.61 million

Cash flow in year 1 to 6 = 2.736

I = 12

NPV = $0.36 MILLION

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute