Question

Gateway Communications is considering a project with an initial fixed assets cost of $1.55 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 $240,000. The project will not change sales but will reduce operating costs by $399,000 per year. The tax rate is 34 percent and the required return is 11.5 percent. The project will require $52,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?

Answer 1

NPV=Present value of cash flows=-1.55*10^6+((399000-1.55/9*10^6)*(1-34%)+1.55/9*10^6)/11.5%*(1-1/1.115^9)+240000*(1-34%)/1.115^9-52000+52000/1.115^9
=225225.4506