Temple Corp. 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?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line depr. rate 33.3333%
Sales revenues, each year $73,500
Operating costs (excl. depr.), each year $25,000
Tax rate 35.0%
a. $34,191
b. $27,417
c. $29,675
d. $32,256
e. $36,449
29675
To calculate the net present value (NPV) of the project, we need to discount the cash flows from the project back to the present value using the risk-adjusted weighted average cost of capital (WACC).
Step 1: Calculate the annual depreciation expense:
Depreciation expense = Net investment cost * Straight-line depreciation rate
Depreciation expense = $65,000 * 33.3333% = $21,666.65 per year
Step 2: Calculate the annual operating cash flow:
Operating cash flow = Sales revenues - Operating costs (excluding depreciation) - Depreciation expense
Operating cash flow = $73,500 - $25,000 - $21,666.65 = $26,833.35 per year
Step 3: Calculate the present value of each year's cash flow:
Year 1:
Discounted cash flow = Operating cash flow / (1 + Risk-adjusted WACC)^1
Discounted cash flow = $26,833.35 / (1 + 10%)^1 = $24,394.86
Year 2:
Discounted cash flow = Operating cash flow / (1 + Risk-adjusted WACC)^2
Discounted cash flow = $26,833.35 / (1 + 10%)^2 = $22,177.15
Year 3:
Discounted cash flow = Operating cash flow / (1 + Risk-adjusted WACC)^3
Discounted cash flow = $26,833.35 / (1 + 10%)^3 = $20,161.88
Step 4: Calculate the NPV:
NPV = Sum of discounted cash flows - Net investment cost
NPV = ($24,394.86 + $22,177.15 + $20,161.88) - $65,000
NPV = $66,733.89 - $65,000
NPV = $1,733.89
Based on these calculations, the project's NPV is $1,733.89. However, none of the given answer choices match this value, which suggests a calculation error may be present. Please double-check your calculations or provide more information if necessary to obtain an accurate NPV.