What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 21%, and the discount rate is 14%.Question 4
Question
What is the NPV of a 6-year project that costs 50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 21%, and the discount rate is 14%.Question 4
Solution
Sure, here's how you can calculate the Net Present Value (NPV) of the project:
Step 1: Calculate the annual cash inflow. This is the annual revenue minus the annual costs. In this case, it's 15,000 = $35,000.
Step 2: Calculate the annual tax. This is the annual cash inflow multiplied by the tax rate. In this case, it's 7,350.
Step 3: Calculate the annual cash inflow after tax. This is the annual cash inflow minus the annual tax. In this case, it's 7,350 = $27,650.
Step 4: Calculate the annual depreciation. This is the initial investment divided by the project's lifespan. In this case, it's 16,667.
Step 5: Add the annual depreciation to the annual cash inflow after tax. This gives you the annual cash flow. In this case, it's 16,667 = $44,317.
Step 6: Calculate the present value of each year's cash flow. This is the cash flow divided by (1 + the discount rate) to the power of the year number. Do this for each year of the project.
Step 7: Add up all the present values. This gives you the total present value of the cash inflows.
Step 8: Subtract the initial investment from the total present value of the cash inflows. This gives you the NPV. If the NPV is positive, the project is considered a good investment.
Here's the calculation for the present value of each year's cash flow:
Year 1: 38,859 Year 2: 34,088 Year 3: $44,317
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