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BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to...

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.

In addition to the BASIC INFORMATION, you find that a salvage company will pay you $10,000 for the assets at the end of year 3. The project will require an investment of $10,000 up front for net working capital. If you expect to sell 7,000 units per year, compute the NPV assuming a required return of 15% and a tax rate of 30%.
A. Less than $0
B. $11,347
C. $14,416
D. $18,807
E. More than $20,000

The answer is D, please show all the steps, thanks!

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Answer #1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

C D E Year 1 2 3 Project Cost Initial NWC 0 -$60,000.00 -$10,000.00 Sale unit Sale Price Variable cost per unit $7,000.00 $20

Cell reference -

A B C D DE F Year 1 2 3 Project Cost Initial NWC 0 -60000 -10000 Sale unit Sale Price Variable cost per unit 7000 20 10 7000

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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