Determining Net Present Value and Weighted Average Cost of Capital

Homework Assignment #3
Student Full Name
Institutional Affiliation
Course Full Name
Professor Full Name
Due Date
Homework Assignment #3
Problem 1:
A new product is being considered for market. An outlay of $16M is required for equipment and $4M for additional net working capital. Management expects the project to have a 4-year useful life and plans to depreciate the equipment according to 3-year MACRS. The expected salvage price of the equipment in four years is S=$3M. Annual revenues are expected to be $11M and annual costs are expected to be $4M. If the project’s cost of capital is 18% and the firm’s marginal tax rate is 40%, compute the project’s NPV.
Year

0

1

2

3

4

Revenue


11,000,000

11,000,000

11,000,000

11,000,000

Minus cost


4,000,000

4,000,000

4,000,000

4,000,000

Depreciation


5,332,800

7,112,000

2,369,600

1,185,600

EBT


1,667,200

-112,000

4, 630,400

5,814,400

Minus:Tax@ 40%


666,880

-44,800

1,852,160

2,325,760

EAT


1,000,320

-67,200

2,778,240

3,488,640

Plus : depreciation


5,332,800

7,112,000

2,369,600

1,185,600

OCF


6,333,120

7,044,800

5,147,840

4,674,240

Initial Investment

-16,000,000





Salvage Value





3,000,000

Working Capital

-4,000,000

-

-

-

4,000,000

Net Cash Flow

-20,000,000

6,333,120

7,044,800

5,147,840

11,674,240

PV@18%

1

0.8475

0.7182

0.6086

0.5158

Present Value

-20,000,000

5,367,051

5,059,466

3,133,134

...