Majestic Theaters is considering investing in some new projection equipment whos

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 fully depreciated 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 closed down. 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 to be 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%

Explanation / Answer

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

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

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