FINANCE Q: NPV PROBLEM?

Anyone feel like helping me out with this? I'm clueless. If possible, tell me how you get the NPV too...

Ivan can purchase and renovate a small building for $100,000, all of which will depreciate (straight-line) to a zero book value over 10 years. The entire project can be sold off, though, for 65,000 at the end of 8 years. Estimated revenues are 100,000 for the first two years and 150,000 for years 3-8. Variable costs are 65% of revenues. He will average about 30,000 in receivables, and accts payable will average 5000. Project's cost of capital is 17.31% and the tax rate is 35%.

What is the NPV of the project?

Update:

edit** 1st answerer, thanks for the tips. but i don't belong in this class and the add/drop class period is over so i need to do well anyway and telling me how to do it still doesn't quite help. If anyone can help me with the answer and how-to, that would be really awesome.

thanks again yo!

1 Answer

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  • 9 years ago
    Best Answer

    Hi, I am not doing the problem for you but, can help you set it up. Use Excel's NPV formula. Based on the information in the problem you are looking at the cash flow over an eight year period and selling the property for $65,000 at the end. What the problem fails to indicate is what happens if you hold the property i.e., assumes zero residual value. So, your time line is eight years. Figure out your cash flow +/- for each year. Put that in an excel spreadsheet with each cell representing one year across the row. Revenues + is 100,000 per year for years 1-2, 150,000 3-8. Subtract expenses that are cash flow i.e., money spent not depreciation. Variable costs 65% of revenue, there will be a lag in revenue of 30,000 per year and 5,000 in Accounts payable (net 25,000 receivables) so factor that into your cash flow (income) when you receive it. Your cost of capital 17.31, is your discount rate. Taxes are payments (negative cash flow) and don't forget to deduct Depreciation before computing taxes at 35%. My advice is to build your income statement by year and then take the net amount (cash flow) and put it into the NPV formula a single row where each cell represents one year (1-8).

    Source(s): =NPV(Rate, period1, period2, ...., period8) where rate is discount rate in your case 17.31%.
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