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2. (A VERY IMPORTANT QUESTION) Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million, which will be depreciated straight-line
2. (A VERY IMPORTANT QUESTION) Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million, which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require a $45,000 investment in inventory in year 0, which will be recouped when the project ends in year 10. Calculate the project's NPV if the required rate of return is 14%. Think incrementally: As far as the OCF is concerned, clearly a $725,000 reduction in operating costs means a $725,000 increase in pre-tax profits. OCF (years 1 through 10) = (Sales - COGS - SG&A) * (1-Tc) + Te * Depreciation 2460.000 - 0 246,000 : 16 (in *000) 0 1 2 3 4 5 Operating 557350 55 7350 557350 53 7850 557350 TL
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