DeVault Services recently hired you as a consultant to help with its capital budgeting process. The company is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
$\begin{array} { l r }
\text { Risk-adjusted cost of capital } & 10.0 \% \
\text { Net investhent cost (depreciable basis) } & \text { \$65,000 } \
\text { Straight-line deprec. rate } & 33.3333 \% \
\text { Sales revenue5, each year } & \$ 65,500 \
\text { Operating costs (excl. teprec.), each year } & 35,000 \
\text { Terate } & 35 \%
\end{array}$

Question

DeVault Services recently hired you as a consultant to help with its capital budgeting process. The company is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
 $\begin{array} { l r } 
\text { Risk-adjusted cost of capital } & 10.0 \% \
\text { Net investhent cost (depreciable basis) } & \text { \$65,000 } \
\text { Straight-line deprec. rate } & 33.3333 \% \
\text { Sales revenue5, each year } & \$ 65,500 \
\text { Operating costs (excl. teprec.), each year } & 35,000 \
\text { Terate } & 35 \%
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text { WACC 10.0\% }\
\text { Investment cost}\
\text { Sales revenues}\
\text { - Operating costs (excl. deprec.)}\
\text { - Depreciation rate= 33.333 \% }\
\text { Operating income}\
\text { (EBIT)}\
\text { - Taxes}\
\text { After-tax EBIT}\
\text { + Depreciation}\
\text { Cash flow}\
\text { NPV}
\end{array}
\begin{array} { l } 
\text { Years }&0&1&2&3 \
-\$ 65,500\
&\$ 65,500 & \$ 65,500 & \$ 65,500 \
&25,000 & 25,000 & 25,000 \
&\underline{21,667} & \underline{21,667} & \underline{21,667} \
&\$ 18,833 & \$ 18,833 & \$ 18,833 \
\
\text { Rate }=35 \%&& \underline{6,592} & \underline{6,592} & \underline{6,592}\
&\$ 12,242 & \$ 12,242 & \$ 12,242 \
&\underline{\$ 33,667} & \underline{21,667} & \underline{21,667} \
-\$ 65,500&\$ 33.908&\$ 33.908&\$ 33.908\
\$ 19.325
\end{array}
\end{array}$

DeVault Services Recently Hired You as a Consultant to Help