FINC 312 questions
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QuizNo.3.docQuiz No.3 Name________________________
The worksheet below presents some information about a project you are asked to evaluate. The project has a two-year economic life. It entails an initial investment of $100 in equipment, all of which will be depreciated over year 1 and year 2. The project is currently using a straight-line depreciation schedule.
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Year 0 |
Year 1 |
Year 2 |
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Capital investment |
100 |
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Working capital |
0 |
20 |
5 |
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After-tax profits |
0 |
10 |
20 |
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Depreciation |
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Changes in working capital |
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Investment in fixed assets |
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Cash flow |
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PV(cash flow) |
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Corporate tax rate is 40%. The project’s opportunity cost of capital is 10%.
1. Compute project NPV using the above worksheet.
2. What is the PV of tax savings from depreciation?
3. What is the PV of tax savings from depreciation if the depreciation schedule is 80% of original cost depreciated in year 1 and 20% in year 2?
