Your company is considering taking on a new project that will cost $200,000. It is estimated that the system will increase sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be depreciated on a MACRS basis over 5 years (depreciation rates are 20%, 32%, 19%, 12% 11%, and 6%) to a zero book value, but the expected salvage at Year 6 is $40,000. The firm will also be required to invest $25,000 in net working capital at Year O, but will recapture this amount at Year 6. You may assume that the tax rate on ordinary income is 40 percent (record negative taxes as a positive cash flow). As you can calculate, the IRR for this project is 13.02%. If we assume that the firm's cost of capital for this project is 9 percent, then what is the NPV for this project? $6,874.69 $13,915.29 $39.0FF 62

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Your company is considering taking on a new project that will cost $200,000. It is estimated that the
system will increase sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other
than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be
depreciated on a MACRS basis over 5 years (depreciation rates are 20%, 32 %, 19%, 12% 11%, and
6%) to a zero book value, but the expected salvage at Year 6 is $40,000. The firm will also be
required to invest $25,000 in net working capital at Year 0, but will recapture this amount at Year 6.
You may assume that the tax rate on ordinary income is 40 percent (record negative taxes as a
positive cash flow). As you can calculate, the IRR for this project is 13.02%. If we assume that the
firm's cost of capital for this project is 9 percent, then what is the NPV for this project?
$6,874.69
$13,915.29
$29,055.63
$21.301.58
O $37,201.15
Transcribed Image Text:Your company is considering taking on a new project that will cost $200,000. It is estimated that the system will increase sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be depreciated on a MACRS basis over 5 years (depreciation rates are 20%, 32 %, 19%, 12% 11%, and 6%) to a zero book value, but the expected salvage at Year 6 is $40,000. The firm will also be required to invest $25,000 in net working capital at Year 0, but will recapture this amount at Year 6. You may assume that the tax rate on ordinary income is 40 percent (record negative taxes as a positive cash flow). As you can calculate, the IRR for this project is 13.02%. If we assume that the firm's cost of capital for this project is 9 percent, then what is the NPV for this project? $6,874.69 $13,915.29 $29,055.63 $21.301.58 O $37,201.15
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