# SS 8, Reading #31, Schweser, page 26

How did they come up with a NPV of \$11,871 and IRR of 23.5%? Here’s the setup for those w/out Schweser: - 3 year project - unit sales = 1500 /year - price = \$50 - variable cost = \$20/unit - fixed cost = \$5000/year - FCInv = \$60000 - Depreciated straight-line over three years to book value of zero - NWCInv = \$15000 - Salvage value at the end of three years = \$10000 - Marginal tax rate = 40% - cost of capital = 15% 1. Initial Outlay = -60000 + -15000 = -75000 2. CF1 = (75000-30000-5000-25000)(.6) + 25000 = 34000 CF2 = (75000-30000-5000-25000)(.6) + 25000 = 34000 CF3 = (75000-30000-5000-25000)(.6) + 25000 = 34000 + 21000 = 55000 3. TNOCF = 10000 + 15000 - (.4)(10000) = 21000 I get a NPV of \$16,437.50 and IRR of 26.75% Where did I go wrong?

“depreciated over 3 years” so depreciation charge is 60k/3 = 20k > CF1 = (75000-30000-5000-***25000***)(.6) + ***25000*** = 34000 becomes CF1 = (75000-30000-5000-20000)(.6)+20000 = 32000 CF2 = 32000 CF3 = 53000 NPV = 11871.79, IRR = 23.52%

duh! i’m an idiot. thx

How come the total dep is 60k? I thought it should be 60k - 10k = 50k. what is wrong here?

I guess depn is 60000/3 =20000 because the question specifically states that the FCINV is depreciated to a book value of zero … If u consider 10000 salvage value then the book value at the end of the three years would be 10000 and not zero.

10k is the salvage value of the project as a whole, not the fixed assets that were being depreciated.

chrismaths brings up a good point about the salvage value of the project as a whole. Check out concept checker problem 5 for a similar situation.