Question

Simpson Enterprises is considering a new project with revenue of $325,000 for the indefinite future. Cash costs are 63 percent of the revenue. The initial cost of the investment is $425,000. The tax rate is 21 percent and the unlevered cost of equity is 17 percent. What is the net present value of the project?

Answer 1

Answer:

net present value =  133808.82

Explanation:

solution

we find here present value of cash inflows that is

Cash inflows = $325,000

and

cash costs @63% =  $204,750

so

cash flow before tax = 325,000  - 204,750 = $120,250

and Tax @21% = $25,252.5

so

Cash flow after tax will be  = $120,250  - $25,252.5 = $94,997.5

Discounting factor is = 0.17

Present value of cash inflows = (cash flows after tax ÷ discounting factor)

Present value of cash inflows = $\frac{94997.5}{0.17}$

Present value of cash inflows = $558808.82

so

net present value = Present value of cash inflow - present value of cash outflows

put here

net present value =  $558808.82 - $425,000

net present value =  133808.82