UP Corp, is considering a new project and the related data are shown below. The equipment that would be used has a

Question

UP Corp, is considering a new project and the related 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 change in net operating 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? Do not round the intermediate calculations and round the final answer to the nearest whole number. Risk-adjusted WACC 10.0% Net investment cost (depreciable basis) $65,000 Straight-line depr. rate 33.3333% Sales revenues, each year $71,000 Annual operating costs (excl. depr.) $25,000 Tax rate 35.0% Group of answer choices $30,190 $28,215 $23,136 $25,958 $25,393

Help In Homework · Accepted Answer

Use NPV function in EXCEL to find the Net present value (NPV) =NPV(rate,Year1 to year3 cashflows)-Year0 cashflow =NPV(10%,Year1 to year3 cashflows)-65000=28215.5 Option II is correct I have given formulas and the calculations to arrive at the Year wise cashflows. Please find it below. WACC 10% Year0 Year1 Year2 Year3 Remarks Revenue 71000 71000 71000 Given Annual operating costs 25000 25000 25000 Given depreciation 21666.67 21666.67 21666.67 65000/3=21666.67 Operating income 24333 24333 24333 Revenue-annual operating costs-depreciation taxes@35% 8517 8517 8517 33%*operating income Operating income after taxes 15817 15817 15817 operating income-taxes depreciation 21666.67 21666.67 21666.67 add back because it’s a non cash item Operating cashflow -65000 37483 37483 37483 operating income after taxes+depreciation Net Present Value 28215.5

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UP Corp, is considering a new project and the related data are shown below

Expert Solution

Archived Solution

Risk-adjusted WACC	10.0%
Net investment cost (depreciable basis)	$65,000
Straight-line depr. rate	33.3333%
Sales revenues, each year	$71,000
Annual operating costs (excl. depr.)	$25,000
Tax rate	35.0%

WACC	10%
	Year0	Year1	Year2	Year3	Remarks
Revenue		71000	71000	71000	Given
Annual operating costs		25000	25000	25000	Given
depreciation		21666.67	21666.67	21666.67	65000/3=21666.67
Operating income		24333	24333	24333	Revenue-annual operating costs-depreciation
taxes@35%		8517	8517	8517	33%*operating income
Operating income after taxes		15817	15817	15817	operating income-taxes
depreciation		21666.67	21666.67	21666.67	add back because it’s a non cash item
Operating cashflow	-65000	37483	37483	37483	operating income after taxes+depreciation

Net Present Value	28215.5