DeVault Services recently hired you as a consultant to help with its capital bud

Question

DeVault Services recently hired you as a consultant to help with its capital budgeting process. The company is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV, given the following information: Risk-adjusted WACC = 10.0%; Net investment cost (depreciable basis) = $65,000; Straight-line depreciation rate = 33.3333%; Sales revenues, each year = $65,500; Operating costs (excl. deprec.), each year = $25,000; Tax rate = 35.0%.

Explanation / Answer

Annual depreciation = 65000 * 0.333333 = 21,666.645

Operating cash flow = ( sales - operating costs - depreciation)( 1 - tax) + depreciation

Operating cash flow = ( 65,500 - 25,000 - 21,666.645)( 1 - 0.35) + 21,666.645

Operating cash flow = $33,908.3258

NPV = Present value of cash inflows - present value of cash outflows

NPV = -65,000 + 33,908.3258 / ( 1 + 0.1)1 + 33,908.3258 / ( 1 + 0.1)2 + 33,908.3258 / ( 1 + 0.1)3

NPV = $19,324.9875

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