Question

The following are the final values to the data that you have been estimating up to this point: You can borrow funds from your bank at 3%. The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project. The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000. The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000. Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment. After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000). The discount rate you are assuming is now 7%. Perform the final NPV calculations and provide a narrative of how you calculated the computations and why. Then provide a summary conclusion on whether you should continue to pursue this business opportunity.