Question

Yellow Sand Food is considering a project that would last for 2 years. The project would involve an initial investment of 166,000 dollars for new equipment that would be sold for an expected price of 131,000 dollars at the end of the project in 2 years. The equipment would be depreciated to 19,000 dollars over 7 years using straight-line depreciation. In years 1 and 2, relevant annual revenue for the project is expected to be 141,000 dollars per year and relevant annual costs for the project are expected to be 41,000 dollars per year. The tax rate is 50 percent and the cost of capital for the project is 6.73 percent. What is the net present value of the project?

Answer 1

Solution: Revenue Less : costs Less : Depreciation Taxable income Less : tax at 50% Net income Add: Depreciation OCF Cost of equipment After tax sale value of equiment** Net cash flows x discount factor at 6.73% PV NPV 0 1 2 141000 141000 -41000 -41000 - 19000 -19000 81000 81000 -40500 -40500 40500 40500 19000 19000 59500 59500 -166000 129500 -166000 59500 189000 1.00000 0.93694 0.87786 -166000.00 55748.15 165916.20 55,664.35 **after tax sale value of equipment cost Less : accu. Depr. book value sale value Gain on sale Tax on gain=3000*0.5 after tax sale value=131000-1500 166,000.00 38,000.00 128,000.00 131,000.00 3,000.00 1,500.00 129,500.00