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NPV of a Proposed Project With 3 Years Estimated Life

Given the following information, calculate the NPV of a proposed project: Cost = $4,000; estimated life = 3 years; initial decrease in accounts receivable = $1,000, which must be restored at the end of the project's life; estimated salvage value = $1,000; earnings before taxes and depreciation = $2,000 per year; method of depreciation = MACRS; tax rate = 40 percent; and cost of capital = 18 percent.

a. $1,137
b. -$ 151
c. $ 137
d. $ 804
e. $ 544

Solution Preview

Answer: e

Depreciation cash flows:

MACRS
Depreciation Depreciable Annual
Year Rates Basis Depreciation
1 0.33 $4,000 $1,320
2 0.45 4,000 1,800
3 0.15 4,000 600
4 0.07 4,000 280
...

Solution Summary

This solution provides step-by-step calculations and answers for determining the NPV.

$2.19