Foley Systems is considering a new investment whose data are shown below.The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life.Revenues and other operating costs are expected to be constant over the project's life.What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
WACC 10.0%
Net investment in fixed assets (basis) $75,000
Required net operating working capital $15,000
Straight-line depreciation rate 33.333%
Annual sales revenues $75,000
Annual operating costs (excl. depreciation) $25,000
Tax rate 35.0%
A)$23,852
B)$25,045
C)$26,297
D)$27,612
E)$28,993

Question

Foley Systems is considering a new investment whose data are shown below.The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life.Revenues and other operating costs are expected to be constant over the project's life.What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
 WACC                                                               10.0%
Net investment in fixed assets (basis)                           $75,000
Required net operating working capital                           $15,000
Straight-line depreciation rate                                  33.333%
Annual sales revenues                                            $75,000
Annual operating costs (excl. depreciation)                      $25,000
Tax rate                                                           35.0%
A)$23,852
B)$25,045
C)$26,297
D)$27,612
E)$28,993

Quizplus · Accepted Answer

The project's NPV is $23,852. The NPV is calculated as the present value of the project's cash flows minus the initial investment. The project's cash flows are constant in Years 1 to 3 and are equal to the annual sales revenues minus the annual operating costs (excluding depreciation) minus the depreciation expense. The initial investment is the net investment in fixed assets plus the required net operating working capital.

Foley Systems Is Considering a New Investment Whose Data Are