Tax effects resulting from the cash outflows

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Glop, Inc., is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables (this is part of the initial investment, but there are no tax effects resulting from the cash outflows). These funds (the inventory and receivables investments) will be recovered when the operation is closed at the end of year 3. The facility will produce sales revenues of $50,000/year for 3 years. Variable operating costs (excluding depreciation) will be 40 percent of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Years 1, 2, and 3 respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a rax refund on this project if the project's income is negative, and a 15 percent required rate of return. Inflation is zero. What is the project's NPV?

Reference no: EM13878022

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