Temple Corp.is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life.Under the new tax law,the equipment used in the project is eligible for 100% bonus depreciation,so it will be fully depreciated at t = 0.The equipment would have a zero salvage value at the end of the project's life.No change in net operating working capital (NOWC)would be required.Revenues and 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.
A) $10,236
B) $3,350
C) $2,592
D) $8,137
E) $2,908

Question

Temple Corp.is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life.Under the new tax law,the equipment used in the project is eligible for 100% bonus depreciation,so it will be fully depreciated at t = 0.The equipment would have a zero salvage value at the end of the project's life.No change in net operating working capital (NOWC)would be required.Revenues and 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. 
A) $10,236 
B) $3,350 
C) $2,592 
D) $8,137 
E) $2,908

Quizplus · Accepted Answer

The project's NPV can be calculated using the following formula:

NPV = -initial investment + PV of cash inflows

The initial investment is the cost of the equipment, which is $55,000. The cash inflows are the revenues minus the operating costs. Since these are expected to be constant over the project's life, we can use the present value of an annuity formula to calculate their PV.

PV of cash inflows = (revenues - operating costs) * PVIFA(r, n)

where r is the discount rate and n is the number of years.

Using a discount rate of 10%, we get:

PVIFA(10%, 3) = 2.4869

PV of cash inflows = ($20,000 - $8,500) * 2.4869 = $29,925.65

Therefore, the project's NPV is:

NPV = -$55,000 + $29,925.65 = $8,137.65

Rounding to the nearest whole number, the answer is D: $8,137.