Litchfield Design is evaluating a 3-year project that would involve buying a new

Question

Litchfield Design is evaluating a 3-year project that would involve buying a new piece o( equipment for 140,000 dollars today The equipment would be depreciated straight line to 50,000 dollars over 2 years In 3 years, the equipment would be sold for an after-tax cash (low of 56,000 dollars In each of the 3 years of the project, relevant revenues are expected to be 116,000 dollars and relevant costs are expected to be 31.000 dollars The tax rate is 50 percent and the cost of capital for the project is 11.97 percent What is the NPV of the project?

Explanation / Answer

Depreciation is added back since it is a deductible expense for tax purpose but is a non cash item.

NPV of the project is $40063.36 approx.

Year Cash Outflow Revenue(a) Costs(b) Depreciatio(c ) Net Revenue before tax(d=a-b-c) Tax(e) Net Cash Flow (d-e+c) Salvage Value Cash Flows PVF 0 -140000 0 0 0 -140000 -140000 -140000 1 116000 31000 45000 40000 20000 65000 65000 0.893096 58051.26 2 116000 31000 45000 40000 20000 65000 65000 0.797621 51845.37 3 116000 31000 0 85000 42500 42500 56000 98500 0.712353 70166.72 NPV

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