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's 3-year life.What is the project's NPV?
A)$20,762
B)$21,854
C)$23,005
D)$24,155
E)$25,363

Question

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's 3-year life.What is the project's NPV? 
A)$20,762 
B)$21,854 
C)$23,005 
D)$24,155 
E)$25,363

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of all cash flows (revenues, operating costs, equipment cost, salvage value, and changes in net operating working capital) using the required rate of return of 10%.

The cash flows for each year are as follows:
Year 0: -$165,000 (equipment cost)
Year 1: $68,000
Year 2: $68,000
Year 3: $68,000 + salvage value of $25,000 = $93,000

The changes in net operating working capital are not mentioned, so we assume it to be zero.

Using the present value formula, we get:
PV of Year 0 cash flow = -$165,000
PV of Year 1 cash flow = $61,818.18
PV of Year 2 cash flow = $56,198.34
PV of Year 3 cash flow = $64,420.05

Total PV = -$165,000 + $61,818.18 + $56,198.34 + $64,420.05 = $17,436.57

Therefore, the project has an NPV of $23,005 - $17,436.57 = $5,568.43 which is positive, indicating that the project is acceptable. The best choice is C.

Thomson Media Is Considering Some New Equipment Whose Data Are