Gateway Communications is considering a project with an init

Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 35 percent and the required return is 10.7 percent. The project will require $48,000 in net working capital, which will be recouped when the project ends. What is the project\'s NPV?

$133,836

$171,046

$176,748

$164,467

$128,017

$133,836

Working:

a.	Calculation of Annual deprceiation

	Annual depreciation		=	(Cost - salvage value)/Useful Life
				=	(1740000-0)/10
				=	$ 1,74,000

b.	Calculation of annual cash flow

	Saving in operating cost			$ 3,83,500
	Depreciation			$ -1,74,000
	Profit before tax			$ 2,09,500
	Tax Expense			$ -73,325
	Net Profit			$ 1,36,175
	Depreciation			$ 1,74,000
	Annual cash flow			$ 3,10,175

c.	Year	Fixed Asset Investment	Net Working Capital Investment	Annual cash flow	Release of net working capital	After tax sale of Equipment	Total cash flow	Discount factor	Present Value

	0	$ -17,40,000	$ -48,000				$ -17,88,000	1.0000	$ -17,88,000
	1			$ 3,10,175			$ 3,10,175	0.9033	$ 2,80,194
	2			$ 3,10,175			$ 3,10,175	0.8160	$ 2,53,111
	3			$ 3,10,175			$ 3,10,175	0.7372	$ 2,28,646
	4			$ 3,10,175			$ 3,10,175	0.6659	$ 2,06,546
	5			$ 3,10,175			$ 3,10,175	0.6015	$ 1,86,582
	6			$ 3,10,175			$ 3,10,175	0.5434	$ 1,68,547
	7			$ 3,10,175			$ 3,10,175	0.4909	$ 1,52,256
	8			$ 3,10,175			$ 3,10,175	0.4434	$ 1,37,539
	9			$ 3,10,175			$ 3,10,175	0.4006	$ 1,24,245
	10			$ 3,10,175	$ 48,000	$ 1,50,800	$ 5,08,975	0.3618	$ 1,84,171

									$ 1,33,836
	Working:

		After tax sale of equipment	=	232000*(1-0.35)
				=	$ 1,50,800

Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value o

Gateway Communications is considering a project with an init

Solution

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