Problem #6: Thomson Media is considering some new equipment whose data are shown

Question

Problem #6: Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project 3-year life. What is the project's NPV? Assume a WACC of 12%. Net investment in fixed assets (depreciable basis) Required net operating working capital Straight-line depreciation rate Annual sales revenues Annual operating costs (excl. depreciation) Expected pre-tax salvage value Tax rate $70,000 $10,000 33.333% $75,000 S30,000 $5,000 35.0%

Explanation / Answer

NPV:

workings:

Annual cash flow:

Terminal cashflow:

Depreciation per year= 70000*33.333%= 23333.33

Year 0 Year 1 Year 2 Year 3 Initial investment         (80,000) Annual cash flows          37,417          37,417          37,417 Terminal cashflows          13,250 Net cash flow         (80,000)          37,417          37,417          50,667 Discount rate@ 12.00%           1.0000          0.8929          0.7972          0.7118 Discounted cash flow (80,000.00)    33,407.74    29,828.34    36,063.53 NPV     19,299.61

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