Question

The following are the final values to the data:

a. The cost of the equipment will be $70,000 and this cost is incurred prior to any cash is received by the project.
b. The expected annual cash revenue of the project will be $30,000.
c. The expected annual cash outflows (expenses/costs) are estimated at being $11,000, excluding depreciation.
d. Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment. The discount rate you are assuming is 6%.
e. After 5 years the equipment will stop working and there will be no salvage value.

Required:
Perform the final NPV calculations and provide a narrative on how you calculated the computations and why (justification of answer).

Answer 1

$3,716.37

Step-by-step explanation:

Initial investment $70,000 (cost of the equipment)

Depreciation expense per year = (cost- salvage value) / useful life = ($70,000 - $0) / 5 years = $14,000

net cash flows per year (the same for every year):

[(revenues - operating expenses - depreciation expense) x (1 - tax rate)] + depreciation expense = [($30,000 - $11,000 - $14,000) x (1 - 30%)] + $14,000 = $3,500 + $14,000 = $17,500

year NCF

0 -$70,000

1 $17,500

2 $17,500

3 $17,500

4 $17,500

5 $17,500

6% discount rate

using a financial calculator, the NPV = -$70,000 + $73,716.37 = $3,716.37

$73,716.37 is the present value of the 5 future cash flows