Question

Gateway Communications is considering a project with an initial fixed assets cost of $1.51 million that will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project the equipment will be sold for an estimated $244,000. The project will not change sales but will reduce operating costs by $407,000 per year. The tax rate is 35 percent and the required return is 11.9 percent. The project will require $54,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Multiple Choice

• $276,697

• $242,327

• $297,357

• $231,791

• $287,765

Answer 1

Gateway	0	1	2	3	4	5	6	7	8	9
Investment	-1,510,000
NWC	-54,000									54,000
Salvage										244,000
Savings		407,000	407,000	407,000	407,000	407,000	407,000	407,000	407,000	407,000
Depreciation		-167,778	-167,778	-167,778	-167,778	-167,778	-167,778	-167,778	-167,778	-167,778
EBT		239,222	239,222	239,222	239,222	239,222	239,222	239,222	239,222	239,222
Tax (35%)		-83,728	-83,728	-83,728	-83,728	-83,728	-83,728	-83,728	-83,728	-83,728
Profits		155,494	155,494	155,494	155,494	155,494	155,494	155,494	155,494	155,494
Cash Flows	-1,564,000	323,272	323,272	323,272	323,272	323,272	323,272	323,272	323,272	535,872
NPV	$242,327

Depreciation = Investment / No. of years

Cash Flows = Investment + NWC + Profits + Depreciation + Salvage x (1 - tax)

NPV can be calculated using the same function on a calculator or excel using 11.9% discount rate.