Foxglove Corp. is faced with an investment project. The following information is associated with this project:
Allowable -
Depreciation -
YearNet Income*for 3-Yr. MACRS class
1 $50,000 0.33
2 60,000 0.45
3 70,000 0.15
4 60,000 0.07
*Assume no interest expenses and a zero tax rate. The project involves an initial investment of $100,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value of $15,000. In addition, the company expects an initial increase in net working capital of $5,000, which will be recovered in year 4.
The cost of capital for the project is 12 percent. What is the project's net present value? (Round your final answer to the nearest whole dollar.)
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A. B. C. D. E.B
Step 1 Calculate depreciation:
Dep 1 = 100,000(0.33) = 33,000.
Dep 2 = 100,000(0.45) = 45,000.
Dep 3 = 100,000(0.15) = 15,000.
Dep 4 = 100,000(0.07) = 7,000.
Step 2 Calculate cash flows:
CF 0 = -100,000 - 5,000 = -105,000.
CF 1 = 50,000 + 33,000 = 83,000.
CF 2 = 60,000 + 45,000 = 105,000.
CF 3 = 70,000 + 15,000 = 85,000.
CF 4 = 60,000 + 7,000 + 5,000 + 15,000 = 87,000.
Step 3 Calculate NPV:
Use CF key on calculator. Enter cash flows shown above. Enter I/YR = 12%. Solve for NPV = $168,604.