Answered: homson Media is considering some new…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 12MC: You are also considering another project that has a physical life of 3 years—that is, the machinery...

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Question

Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life. Under the new tax law, the equipment is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. The equipment would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional net operating working capital (NOWC) would be required, but it would be recovered at the end of the project's life. Revenues and operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.

WACC	10.0%
Equipment cost	$70,000
Required net operating working capital (NOWC)	$10,000
Annual sales revenues	$61,000
Annual operating costs	$30,000
Expected pre-tax salvage value	$5,000
Tax rate	25.0%