I do not understand how year 10 is calculated, why we used depreciation of year 11 (13120) and how NPV of 77042.04 was calculated. How was it determined we should not buy it? Pease explain step by step. The answer is below but seems like a lot of steps are skipped which is confusing me.

Thank you

Timco is considering the construction of a new retail outlet. The construction cost will be 400000. Net working capital will increase by 10000. The depreciation is 10 year MACRS. The new location will increase sales by 90000 and increase costs by 40000 per year. The tax rate is 40%. Assume we can sell the location for 50000 at the end of the tenth year.The WACC is 8%. Find the NPV. Should we buy it?

Year zero cash outflow is 400000 (purchase) +10000 (NWC) =410000. Using the MACRS table, depreciation by year is 40000, 72000, 57600, 46080, 36880, 29480, 26200, 26200, 26240, 26200, 13120.

Year Zero: (410000)

Years One through Nine: (?S-?C)*(1-t) +?D*t.This is the after tax operating cash flow and the depreciation tax shield.

Year One:(90000-40000)*(.6) + 40000*.4 = 30000 + 16000 = 46000

Year Two:30000 + 28800 = 58800

Year Three:30000 + 23040 = 53040

Year Four:30000 + 18432 = 48432

Year Five:30000 + 14752 = 44752

Year Six:30000 + 11792 = 41792

Year Seven:30000 + 10480 = 40480

Year Eight:30000 + 10480 = 40480

Year Nine:30000 + 10496 = 40496

In Year Ten we get the operating flow and the tax shield, plus we sell off what we can from the assets and recover our net working capital.

Year Ten:30000 + 10480 + [(50000-13120)*.6 + 13120] + 10000 = 30000 + 10480 + 35248 + 10000 = 85728.

The NPV is (77042.04), so we should not open the new store.To get to an NPV of zero, we would have to raise the net cash inflow by 11481.54 per year (this is just an EAA) or reduce the year zero cash flow by 77042.

Depreciation Rate in % for Recovery Period Year 3-year 5-year 7-year 10-year 15-year 20-year 33.33 20.00 14.29 10.00 5.00 3.750 44.45 32.00 24.49 18.00 9.50 7.219 14.81 19.20 17.49 14.40 8.55 6.677 7.41 11.52 12.49 11.52 7.70 6.177 11.52 8.93 9.22 6.93 5.713 5.76 8.92 7.37 6.23 5.285 8.93 6.55 5.90 4.888 4.46 6.55 5.90 4.522 6.56 5.91 4.462 10 6.55 5.90 4.461 11 3.28 5.91 4.462 12 5.90 4.461 13 5.91 4.462 14 5.90 4.461 15 5.91 4.462 16 2.95 4.461 17 4.462 18 4.461 19 4.462 20 4.461 21 2.231