Professor Jordan is changing jobs to become the CFO of Success Corp. Specificall

Question

Professor Jordan is changing jobs to become the CFO of Success Corp. Specifically, he is considering a new investment whose data are shown below.

a) The investment project will utilize a piece of land with the market of value of $15,000.

b) Professor Jordan is always careful, so he advised the firm to hire a marketing research firm and conduct feasibility research on the project, which has already cost the firm $10,000.

c) The project will require the purchase of machinery and equipment for the amount of $75,000.

d) The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value.

e) The project also would require additional net operating working capital for the amount of $15,000 that would be recovered at the end of the project's life.

f) The company has a WACC of 10% and a tax rate of 35%

g) The project would increase the company's annual sales by $75,000 each year for three years. (t=1 to t=3)

h) Annual cost for the project will be $25,000 per year.

i) The firm pays $12,000 interest expenses every year for their bank loans.

What is the project's NPV?

Note: The problem doesn't have an answer key so I have no idea how to verify the answer... I tried my best and calculated the project's NPV as -$1,147.63 , so reject the project. I added a photo of my calculations. Thanks.

of cost Awwe Incremede cash fous + Depreciation, Ignare allocated sunbooss ignore interest experes Step | Ignore tetely non-cele vest cash flousner B, I Step 2: Calculate initial cast2 | 15,000 + 10, 000 + 75,000 + 15,000 =>jus, oco |Step 3: Colculate inorenental operating det cash fous (1-2) locrementa sales 2 75, co (Incremedel cost) (25, 000) | (Inereyental depreciation) (25 000 ) Incrementa taxable incomelas 25,000.nl (Incremental Hoxes @ 3526) (8,750) Incrimentel net income |6, 250 Depreciation 25,000 lacreuertel opening net cash flow Pu, 250 Step 4: Catoclate ooremetel et Cash flow F4L250 + 15, 000 - Ps 6,250 ecision PV/ : Sep CF. ? - IIS, OCO CO2 41,250 FO, = 2 CO2 > 56250 FOz - ) NPV -$ 1,147, 63, Rejed Project

Explanation / Answer

This is a very good attempt. I've suggested some changes. If you have any doubts clarify via comments

The land and the feasibility study report costs are sunk costs and not investment costs. They will therefore not be used in project analyis.

So your initial cost is just $90,000

Cashflow post taxes = (Revenues - Operating Expenses -Depreciation - Interest ) * (1-tax rate) + Depreciation + (tax rate * interest)

Here, note that interest tax shield will also be added back with depreciation

Cashflow post taxes = (75000 - 25000 - 25000 - 12000) * (1- 35%) + 25000 + (35% * 12000) = 37650

in year 3, cashflow will also include released working capital of 15000

NPV = -90,000 + 37650/1.1 + 37650/1.12 + 52650/1.13

= 14899.699 ~ = 14900

NPV is positive :-)

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