TCO H) 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 three 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 three year life. What is the project’s NPV? (Hint: Cash flows are constant in years 1 3.)
WACC
Opportunity cost
Net equipment cost (depreciable basis)
Straight line deprec. rate for equipment
Sales revenues, each year
Operating costs (excl. deprec.), each year
Tax rate 10.0%
$100,000
$65,000
33.333%
$123,000
$25,000
35%
a. $10,521
b. $11,075
c. $11,658
d. $12,271
e. $12,885
Indicate your choice for your answer a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer.