A project has an initial cost of $480,000,projected revenue of $311,500,cash costs of $214,650,an unlimited life,a tax rate of 21 percent,and a weighted average cost of capital of 13.8 percent.What is the net present value of the project?

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Quizplus · Accepted Answer

To calculate the Net Present Value (NPV) of the project, we first need to determine the project's net cash flow. The net cash flow can be calculated as the projected revenue minus the cash costs, and then we adjust for taxes. The formula for net cash flow (NCF) is: NCF = (Revenue - Cash Costs) * (1 - Tax Rate).Given:- Initial cost = $480,000- Projected revenue = $311,500- Cash costs = $214,650- Tax rate = 21%- WACC (Weighted Average Cost of Capital) = 13.8%First, calculate the net cash flow before tax:Net cash flow before tax = $311,500 - $214,650 = $96,850Then, calculate the after-tax net cash flow:After-tax net cash flow = $96,850 * (1 - 0.21) = $96,850 * 0.79 = $76,511.50Since the project has an unlimited life, we treat the after-tax net cash flow as a perpetuity. The formula to calculate the present value of a perpetuity is: PV = Cash Flow / WACC.Therefore, the present value of the net cash flows is:PV = $76,511.50 / 0.138 = $554,437.68Finally, to find the NPV, we subtract the initial cost from the present value of the net cash flows:NPV = $554,437.68 - $480,000 = $74,437.68Rounding to the nearest dollar gives us an NPV of approximately $74,431, which corresponds to option E.

A Project Has an Initial Cost of $480,000,projected Revenue of $311,500,cash