Acme Storage currently has a revenue of $100,000 per year and is earning a gross profit margin of  40%. The firm is considering a new project which will double both the revenue and the operating  cost for the following three years. The new project requires purchase of an equipment that is worth  $300,000. The equipment will be depreciated linearly over the next three years. At the end of the  third year, the equipment will be fully depreciated, but the firm can still sell it on the market for $100,000.

 
a) Assume a tax rate of 40% and a discount rate of 10%. What is the NPV of the project? 

b) What is the NPV of the project if at the end of the third year, the equipment still has a book value of $200,000 after deprecation, but the firm can only sell it on the market for $100,000?

c) Now let us stick to the original assumptions in the problem, do you think the IRR of the  investment is higher or lower than 10% (you don't need to calculate the actual IRR)? 

What  is the payback period for this investment?

Answer rating: 100% (QA)

a To calculate the net present value NPV of the project we need to determine the cash flows and disc... View the full answer