Your company is considering a machine which will cost R50,000 at Time 0 and which can be sold after 3 years for R10,000.R12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3.The facility will produce sales revenues of R50,000/year for 3 years; variable operating costs (excluding depreciation) will be 40 percent of sales.No fixed costs will be incurred.Operating cash inflows will begin 1 year from today (at t = 1).By an act of Congress, the machine will have depreciation expenses of R40,000, R5,000, and R5,000 in Years 1, 2, and 3 respectively.The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent required rate of return.Inflation is zero.What is the project's NPV?

Question

Quizplus · Accepted Answer

The correct answer is A because the project's NPV is R7,673.71. This can be calculated using the following formula:NPV = -Initial Investment + Sum of Present Values of Future Cash FlowsThe initial investment is R50,000 + R12,000 = R62,000. The present value of the future cash flows is calculated as follows:Year 1: R50,000 * (1 - 0.4) * (1 - 0.4) / (1 + 0.15)^1 = R24,000Year 2: R50,000 * (1 - 0.4) * (1 - 0.4) / (1 + 0.15)^2 = R20,869.57Year 3: R50,000 * (1 - 0.4) * (1 - 0.4) / (1 + 0.15)^3 + R10,000 / (1 + 0.15)^3 = R19,504.14Therefore, the NPV is R62,000 - R24,000 - R20,869.57 - R19,504.14 = R7,673.71.

Your Company Is Considering a Machine Which Will Cost R50,000