Garden-Grow Products 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.) $\begin{array}{lr}
\text { Proj ect cost of capital (r) } & 10.0 \% \
\text { Net investment in fixed assets (basis) } & \$ 75,000 \
\text { Required new working capital } & \$ 15,000 \
\text { Straight-line deprec. rate } & 33.333 \% \
\text { Sal es revenues, each year } & \$ 75,000 \
\text { Operating costs (excl. deprec.), each year } & \$ 25,000 \
\text { Tax rate } & 25.0 \%
\end{array}$
A) $30,069
B) $31,573
C) $33,152
D) $34,809
E) $36,550

Question

Quizplus · Accepted Answer

The project's NPV is $30,069. This can be calculated using the following formula:NPV = -Initial Investment + Sum of Present Value of Future Cash FlowsThe initial investment is the cost of the fixed assets plus the required new working capital, which is $75,000 + $15,000 = $90,000.The present value of the future cash flows can be calculated using the following formula:PV = CF * (1 - (1 + r)^-n) / rwhere:CF is the cash flowr is the project cost of capitaln is the number of yearsThe cash flow for each year is the sales revenue minus the operating costs and depreciation, which is $75,000 - $25,000 - $25,000 = $25,000.The present value of the future cash flows is:PV = $25,000 * (1 - (1 + 0.1)^-3) / 0.1 = $65,069The NPV is then:NPV = -$90,000 + $65,069 = $30,069

Garden-Grow Products Is Considering a New Investment Whose Data Are