Labtech, a laboratory equipment corporation, is considering entering the business
of making soundproof rooms. This will require an initial investment of $80,000 at
the end of 2012. The project has a 3-year life, after which the salvage value is
1/5th of the initial investment. Labtech forecasts the following:
2013 2014 2015
Number of units sold 20 40 25
Costs of running plant 289,000 155,000 140,000
Labtech anticipates it can sell the rooms for $10,000 each. Labtech uses
straight-line depreciation and faces a tax rate of 34%. Assume all cash flows are
received at year end and that Labtech has profitable ongoing operations such that
any losses for tax purposes can be offset against these. Develop a table showing
the annual cash flows and calculate the NPV of this project at an 8% discount
rate.
