Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Project cost of capital (r) 10.0% Opportunity cost $100,000 Net equipment cost (depreciable basis) $65,000 Straight-line deprec. rate for equipment 33.333% Sales revenues, each year $123,000 Operating costs (excl. deprec.), each year $25,000 Tax rate 25%
Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Project cost of capital (r) 10.0% Opportunity cost $100,000 Net equipment cost (depreciable basis) $65,000 Straight-line deprec. rate for equipment 33.333% Sales revenues, each year $123,000 Operating costs (excl. deprec.), each year $25,000 Tax rate 25%
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 9P
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Question
Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
| Project cost of capital (r) | 10.0% |
| $100,000 | |
| Net equipment cost (depreciable basis) | $65,000 |
| Straight-line deprec. rate for equipment | 33.333% |
| Sales revenues, each year | $123,000 |
| Operating costs (excl. deprec.), each year | $25,000 |
| Tax rate | 25% |
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