Orange Logistic is thinking of opening a new warehouse, and the key data are sho

Question

Orange Logistic is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project’s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating cost would be constant over the project’s 3-year life. What t is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)

WACC 10.0%

Opportunity cost$100,000.

Net equipment cost (depreciable basis)$65,000.

Straight-line deprec. Rate for equipment 33.333%

Sales revenues, each year$123,000.

Operating costs (excl. deprec.), each year$25,000.

Tax rate35%

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Explanation / Answer

Ans-

Total investment100000+65000=$165000

Year Sales Revenue Operating cost Depreciation Pre_tax Profit Tax @35% After tax profit After tax profit + dep DF @10% Present Value 1 123000 25000 33333 64667 22633.45 42033.55 75366.55 0.909 68508 2 123000 25000 33333 64667 22633.45 42033.55 75366.55 0.826 62253 3 123000 25000 33334 64666 22633.1 42032.9 75366.9 0.751 56601 Net cash Inflow 187362 Less-Investment 165000 NPV $22362

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