Sub-Prime Loan Company is thinking of opening a new office

Sub-Prime Loan Company is thinking of opening a new office

9.      Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project’s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)

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WACC10.0%
Opportunity cost$100,000
Net equipment cost (depreciable basis)$  65,000
Straight-line deprec. rate for equipment33.333%
Sales revenues, each year$123,000
Operating costs (excl. deprec.), each year$  25,000
Tax rate35%

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