Thomson Media is considering some new equipment whose data are shown below.The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years,but it would have a positive pre-tax salvage value at the end of Year 3,when the project would be closed down.Also,additional net operating working capital would be required,but it would be recovered at the end of the project's life.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.

Question

Quizplus · Accepted Answer

To calculate the NPV we need to find the present value of all cash inflows and outflows from the project. In this case, we have the initial investment, operating cash flows, and the salvage value. Using a required rate of return of 10%, we can find the present value of these cash flows and subtract the initial investment.
The NPV calculation is given below:
NPV = -Initial Investment + PV(Operating Cash Flows) + PV(Salvage Value)
NPV = -$75,000 + (Annual Operating Cash Flow * PVIFA(10%, 3)) + (Salvage Value / (1 + 10%)^3)
NPV = -$75,000 + ($33,000 * 2.48685) + ($28,000 / 1.10^3)
NPV = $26,238
Since the NPV is positive, this project should be accepted. Therefore, the best choice is A.

Thomson Media Is Considering Some New Equipment Whose Data Are