Question

Majestic Theaters is considering investing in some new projection equipment whose data are shown below. The required equipment has a 3-year tax life and would be fullydepreciated by the straight-line method over the 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closeddown. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected tobe constant over the project's 3-year life. What is the project's NPV?

WACC 10.0%
Net investment in fixed assets (depreciable basis) $65,000
Required new working capital $10,000
Straight line depr'n rate 33.333%
Sales revenues, each year $70,000
Operating costs excl. depr'n, each year $25,000
Expected pretax salvage value $5,000
Tax rate 35.0%

Answer 1

		Year
Sales revenues	70000	0	-65000
Depreciation Rate = 33.333%	-25000	1	36883
Operating income (EBIT)	-21665	2	36883
Operating profit /ebit	23336	3	36883
Taxes Rate = 35%	-8167
Profit After-tax	15168
Add depreciation	21665
Operating net cash flow	36883

answer = $ 26 584---NPV

Answer 2

Year	1	2	3
Outflow of working capital (a)	(10,000.00)
Outfloe in fixed assets (b)	(65,000.00)
Release of working capital ( C )			10,000.00
Sales revenue	70,000.00	70,000.00	70,000.00
Less: Operating cost	25,000.00	25,000.00	25,000.00
Depreciation	21,666.45	21,666.45	21,666.45
Profit before tax	23,333.55	23,333.55	23,333.55
Tax @ 35%	8,166.74	8,166.74	8,166.74
Profit after tax	15,166.81	15,166.81	15,166.81
Inflow =(Profit after tax+depreciation) (d)	36,833.26	36,833.26	36,833.26
Salvage proceeds received			5,000.00
Tax on salvage proceeds @ 35%			1,750.00
Net inflow from salvage proceed (e)			3,250.00
Net inflow/(outflow),f = (a+b+c+d+e)	(38,166.74)	36,833.26	50,083.26
Discounting factor @10% ,g	0.91	0.83	0.75
Present value of net inflow/(outflow) (f*g)	(34,697.04)	30,424.27	37,612.53
Therfore total Net present value	= -34,697.038+30,424.271+37,612.526
	33,339.76