GardenGrow Products is considering a new investment whose da

Garden-Grow Products is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project\'s 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project\'s life. Revenues and other operating costs are expected to be constant over the project\'s life. What is the project\'s NPV? (Hint: Cash flows are constant in Years 1 to 3.) WACC Net investment in fixed assets (basis) Required new working capital Straight-line deprec. rate Sales revenues, each year Operating costs (excl. deprec), each year ax rate 10.0% $75,000 $15,000 33. 333% $75,000 $25,000 35.0%

Solution

Initial investment = 75,000 + 15,000 = 90,000

Annual depreciation = 75,000 * 0.33333 = 24,999.75

Operating cash flow for 1 to 3 years = ( Sales - operating costs - depreciation)( 1 - tax) + depreciation

Operating cash flow for 1 to 3 years = ( 75,000 - 25,000 - 24,999.75) ( 1 - 0.35) + 24,999.75

Operating cash flow for 1 to 3 years = $41,249.9125

Year 3 non operating cash flow =,15,000

Total year 3 cash flow = 15,000 + 41,249.9125 = 56,249.9125

NPV = Present value of cash inflows - present value of cash outflows

NPV = -90,000 + 41,249.9125 / ( 1 + 0.1)¹ + 41,249.9125 / ( 1 + 0.1)² + 56,249.9125 / ( 1 + 0.1)³

NPV = 23,852.149