Question - Probabilities, Inc. is considering the following investment. For financial reporting purposed the entire initial investment will be depreciation over 5 years by the straight-line method. For tax purposes, the entire initial investment will be depreciated by MACRS over 5 years. The working capital will be released at the end of the project. The investment will last 7 years.
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Investment at t=0
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900,000
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5-yr MACRS
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|
Working Capital at t=0
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50,000
|
1
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20.00%
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Revenue/year
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285,000
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2
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32.00%
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|
Expenses/year
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65,000
|
3
|
19.20%
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Salvage value
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-
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4
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11.52%
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Residual value at term
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20,000
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5
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11.52%
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Tax rate (ordinary & capital gains)
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30%
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6
|
5.76%
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Cost of Capital
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10.0%
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|
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Requirements - What is the net present value of the investment? (10%