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

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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%

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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%