Dumba is considering expanding into a new line of business. The expansion will require an investment today of $500,000 in new equipment. This equipment, which will cost another $300,000 today to install, will be depreciated on a straight line basis over an 8 year period to an estimated salvage value of zero. The expansion project will require a working capital investment of $100,000 today. Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8. Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years. Dumba has a tax rate of 40% and its required rate of return for the project under consideration is 16%. Dumba assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year.
What is the NPV of the project?
= 100,000
OCF = (S-C) ´ (1-T) + T´D
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Depreciation = 500,000 + 300,000
8= 100,000
OCF = (S-C) ´ (1-T) + T´D
|
Year
|
Depreciation
|
Sales
|
Costs
|
OCF
|
|
0
|
|
|
|
|
|
1
|
$100,000.00
|
$650,000
|
-310,000
|
$244,000.00
|
|
2
|
$100,000.00
|
$650,000
|
-310,000
|
$244,000.00
|
