Question

7 You are assessing an investment project that has the following associate accounting assessments Completed market research project Capital investment requirement Annual revenues for 6 years Allocated overheads from head office Cost of goods sold (annual) Capital depreciation $80,000 $250,000 rs$150,000 $10,000 annually $70,000 5 year straight line What is the NPV of the project at 7% (10)

Answer 1

Completed market research project cost of $ 80,000 is a sunk cost and hence it's irrelevant.

Allocated overheads from head office is not an incremental cost and hence it's irrelevant.

All financials below are in $.

Initial investment = C₀ = 250,000

Life, N = 5 years

Annual depreciation = C₀ / N = 250,000 / 5 = 50,000

Annual cash flows = (Revenue - COGS - Annual depreciation) x (1 - tax rate) + Annual depreciation

There is no information on tax rate. Hence tax rate = 0%

In that case, Annual cash flows, C = Revenue - COGS = 150,000 - 70,000 = 80,000

Life of the project, n = 6 years

Discount rate, r = 7%

Hence, NPV = - C₀ + C / r x [1 - (1 + r)^-n] = - 250,000 + 80,000 / 7% x [1 - (1 + 7%)^-6] = $  131,323