Question

Shoe famous SF is considering building a new inventory warehouse for $500,000. The warehouse would allow SF to increase their pre-tax cash flows by $100,000 each year. The company would plan to use the warehouse for 10 years before selling it for $200,000. The company uses straight-line depreciation. SF’s tax rate is 20%, and the required rate of return is 10%.

What is the Net Present Value (NPV) of the proposed investment?

Select one:

a. $19,517

b. ($55,591)

c. $77,108

d. $90,119

e. $57,873

Answer 1

Answer: [Option - d] i.e. {$90,119}

Step 1	Intial Outflow				Amount ($)
	Cost of Inventory Warehouse				$500,000
	Total				$500,000
Step 2	Cash Inflows (CFAT)				Amount ($)
	Cash Flow Before Tax	$100,000
	Less: Depreciation [SLM]	($30,000)
	[$500,000 - $200,000]
	10 Years
	Profit Before Tax	$70,000
	Less: Tax @ 20% [$70,000 x 20%]	($14,000)
	Profit After Tax	$56,000
	Add: Depreciation	$30,000
	Cash Inflows (CFAT)	$86,000
Step 3	Terminal Flow				Amount ($)
	Salvage Value	$200,000
	Less: Tax @ 20% [$200,000 x 20%]	($40,000)
	Total				$160,000
	CALCULATION OF NET PRESENT VALUE [NPV]
Step 4	Cash Flow	Year	Amount ($)	PVF @ 10%	PV Amount ($)
	Intial Outflow	0	($500,000)	1	($500,000)
	Annual Saving [CFAT]	1-10	$86,000	6.14456	$528,432
	Salvage Value [After Tax @ 20%]	10th	$160,000	0.38554	$61,686
	Net Present Value				$90,119