Problem:
Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $394 thousand that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated pre-tax salvage value is $61 thousand. The project requires $30 thousand initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $180 thousand a year.
Required:
Question: What is the net present value of this project if the relevant discount rate is 17.6 percent and the tax rate is 30 percent?
Note: Provide support for your underlying principle.