Your company is considering a project that costs $50 million. The projected will be depreciated on a straight line basis over the equipment's 4-year life.

The project requires an investment in net working capital of $2.0 million. This is recoverable at whenever the project ends. The tax rate is 20% and the discount rate is

8%. You have the following estimates of future cash-flows:

Year Revenues (Millions) Pre-Tax Expenses(millions) Market value of the equipment if the project is abandoned at the end of the year (millions)

1 20.0 2.40 35.00

2 20.0 2.40 32.00

3 20.0 2.40 8.00

4 20.0 2.40 0.00

(a) What is the NPV of the project if it will be continued to the end of its 4-year life?

Revenues

Pre-tax expenses

Depreciation

EBT

Taxes

Net income

OCF per year

(b) Find the NPV if the project is abandoned after 1 year, 2 years, etc. Don't forget to calculate the taxes due on the sale of the equipment. When is the optimal time

to abandon the project?

1 2 3 4

PVFA for year

PV of OCF up to year t

book value of equipment

Taxable gain

After tax cash from sale

Recover NWC

CF from sale and NWC recovery

PV of CF up to year t

NPV