A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0).You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60 percent of revenues.(Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]).The equipment depreciates using straight-line depreciation over three years.At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30 percent and the cost of capital is 15 percent.Calculate the NPV of the project.
A)$3,840
B)$8,443
C)$-2,735
D)$7,342

Question

Quizplus · Accepted Answer

The NPV is calculated by finding the net cash flows for each year, considering revenues, costs, depreciation, tax impacts, and terminal cash flows, and then discounting them at the cost of capital. The correct NPV is $8,443.

A Project Requires an Initial Investment in Equipment of $90,000