The pro forma income statement and cash flow statement for OneShot, Inc., are provided below. The firm has a cost of capital of 10%. Cash flows from investing activities: Cash flows from financing activities:
-Refer to the income statement and cash flow statement above. Assume that OneShot's project cash flows are a perpetuity, and calculate its NPV.

Question

The pro forma income statement and cash flow statement for OneShot, Inc., are provided below. The firm has a cost of capital of 10%.   Cash flows from investing activities:  Cash flows from financing activities:  
-Refer to the income statement and cash flow statement above. Assume that OneShot's project cash flows are a perpetuity, and calculate its NPV.

Quizplus · Accepted Answer

The project cash flows are a perpetuity, so the NPV is calculated as the present value of the annual cash flow divided by the discount rate. The annual cash flow is $7,000, and the discount rate is 10%, so the NPV is $7,000 / 0.10 = $70,000. However, the question asks for the NPV after taxes, so we need to subtract the taxes from the annual cash flow before calculating the NPV. The tax rate is 30%, so the after-tax annual cash flow is $7,000 * (1 - 0.30) = $4,900. The NPV after taxes is therefore $4,900 / 0.10 = $49,000.

The Pro Forma Income Statement and Cash Flow Statement for OneShot