Garden-Grow Products is considering a new investment whose data are shown below.
ID: 2701435 • Letter: G
Question
Garden-Grow Products is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that 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 life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
WACC 10.0%
Net investment in fixed assets (basis) $75,000
Required new working capital $15,000
Straight-line deprec. rate 33.333%
Sales revenues, each year $75,000
Operating costs (excl. deprec.), each year $25,000
Tax rate 35.0%
PLEASE SHOW WORK!!!
Explanation / Answer
Depreciation per year = 75000/3 = 25000
Cashflow in year 0 = -75000-15000 = -90000
Profit before tax = sales - operating cost - depreciation = 75000-25000-25000 = 25000
Tax = 35%*25000 = 8750
Net income = 25000*(1-35%)= 16,250
Cashflow in years 1 and 2 = net income + depreciation = 16,250+25000 = 41,250
Cashflow in year 3 = 41,250 + 15000 (recovered from working capital) = 56,250
NPV = -90000+41,250/1.1^1+41,250/1.1^2+56,250/1.1^3 = $23,852.37
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