An analyst gathered the following data about a project: . Costs are $8,000 plus $2000 in shipping and handling . For the next five years the project will annually generate %5000 in sales and 2000 in costs, not including depreciation. . The project is being depreciated on a straight-line basis over five years with no salvage value. . The company's tax rate is 40% and the weighted average cost of capital is 10% The project's NPV is closest to : A. -144 B. $144 C. $279 D. $1244 Answer is A. I’m completely lost on this one
Depreciation = 10000/5 = 2000 CF = (5000-2000-2000)*(1-.4) + 2000 = 2600 NPV CF0 = -10000 CF1 = 2600 F1 = 5 I=10 NPV = -144
concerning this: CF = (5000-2000-2000)*(1-.4) + 2000 = 2600 I understand that you woult want to take the after tax cash flows for this, however why do you subtract out deprection, calculate the after tax cash flow, and then add it back?
NI = Sales - Cost - Depreciation * (1-T) After tax CF = NI + Depreciation.
Many Thanks cpk!!