Goldsmith Labs recovers gold from printed circuit boards. It has developed new e

Question

Goldsmith Labs recovers gold from printed circuit boards. It has developed new equipment for this purpose. You have the following data.

1) The equipment costs $250,000.
2) It costs $200,000 per year to operate.
3) It has an economic life of five years and is depreciated using the straight-line method.
4) It will recover 300 ounces of gold per year.
5) The current price of gold is $900 per ounce and is expected to increase at a rate of 4% per year for the foreseeable future.
6) The tax rate is 30%.
7) The cost of capital is 8%.

What is the NPV of installing this equipment?

Explanation / Answer

That's wrong. The correct answer is: To find NPV: subtract equipment cost; add in PV of depreciation tax effect; add in after-tax PV of revenue from gold recovery; and subtract PV of after-tax costs of operation.

= -250,000 + [PV of (0.3)(50,000) for five years at 8%] + (5)(900)(300)(1 - 0.3)
- PV of (1 - 0.3)(200,000) for five years at 8%;
= -250,000 + 59,890 + 945,000 - 558,979;
= 195,911.

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