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Computing Net Present Value

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Sales Kids' Place is considering a new investment whose data are shown below. The equipment that would be used has a 3-year life, would be depreciated on a straight line basis over the project's 3-year life, would have a salvage value, and would require some new working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?

WACC 10%
Net equipment cost (depreciable basis) $65,000
Required new working capital $10,000
Straight line depr'n rate 33.33%
Sales revenues $70,000
Operating costs excl. depr'n $25,000
Tax rate 35%

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The Net Present Value is the discounted value of the firm's free cash flows. ...

Solution Summary

Using an Excel 97-2003 spreadsheet, this solution illustrates how to compute a project's free cash flow and net present value.