Gateway Communications is considering a project with an initial fixed asset cost

Question

Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment is scrapped. The project will increase pre-tax revenues to the firm by $725,000 a year. The tax rate is 35 percent. If the firm requires a 14 percent rate of return what is the Net Present Value of this project?

The NPV is -$172,937.49.

The NPV is $387,516.67

The NPV is $251,860.34

The NPV is -$87,820.48.

The NPV is $447,202.05

Explanation / Answer

Ans:The NPV is $447,202.05

Initial Investment = -2460000

Annual Cash Inflow = (Annual Savings - Depreciation)*(1-Tax Rate) + Depreciation = (725000 - 2460000/10)*(1-.35) + 2460000/10 = 557350

year Cash flows Rate@14% PV 0 -2460000 1 -2460000 1 557350 0.877192982 488903.5 2 557350 0.769467528 428862.7 3 557350 0.674971516 376195.4 4 557350 0.592080277 329995.9 5 557350 0.519368664 289470.1 6 557350 0.455586548 253921.2 7 557350 0.399637323 222737.9 8 557350 0.350559055 195384.1 9 557350 0.307507943 171389.6 10 557350 0.26974381 150341.7 NPV 447202.1

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