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Creative Software Corporation is considering a new project whose data are shown below. The required equipment...

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Finance

Creative Software Corporation is considering a new project whosedata are shown below. The required equipment has a 3-year tax life,after which it will be worthless, and it will be depreciated byMACRS over 3 years. Revenues and other operating costs are expectedto be constant over the project’s 3-year life. What is theproject’s NPV? Briefly discuss your results.

Equipment cost $65,000

Sales Revenue each year $60,000

OperatingCosts               $25,000

SalvageValue                 $15,000

TaxRate                          35%

Answer & Explanation Solved by verified expert
3.9 Ratings (466 Votes)

0 1 2 3
Initial investment - 65000
sales revenue 60000 60000 60000
less:Operating cost -25000 -25000 -25000
Depreciation -21664.5   [65000*.3333] -28892.5    [65000*.4445] -9626.5 [65000*.1481]
Income before tax 13335.5 6107.5 25373.5
less:tax - 4667.43    [13335.5*.35] -2137.63    [6107.5*.35] -8880.73    [25373.5*.35]
Net income 8668.07 3969.87 16492.77
Add:depreciation 21664.5 28892.5 9626.5
After tax sale value 11435.78
cash flow -65000 30332.57 32862.37 37555.05
PVF@ 10%` 1 .90909 .82645 .75131
NPV =Cash flow *PPVF -65000 27575.04 27159.11 28215.48 17949.63

**Book value at end of year3 =65000-21664.5 -28892.5 -9626.5= 4816.5

Gain on sale = 15000-4816.5 = 10183.5

Tax on sale = 10183.5*.35= 3564.23

After tax sale value= 15000-3564.23 = 11435.78

**Cost of capital is assumed to be 10% since not provided in question.

PVF =1/(1+i)^n where i =10% ,n=1,2,3
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Transcribed Image Text

Creative Software Corporation is considering a new project whosedata are shown below. The required equipment has a 3-year tax life,after which it will be worthless, and it will be depreciated byMACRS over 3 years. Revenues and other operating costs are expectedto be constant over the project’s 3-year life. What is theproject’s NPV? Briefly discuss your results.Equipment cost $65,000Sales Revenue each year $60,000OperatingCosts               $25,000SalvageValue                 $15,000TaxRate                          35%

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