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there is 2 formats to solve npv right
in fernhust co question
exam kit answer is solved using the format which requires add back of tax allowable depreciation,
but while i was practicing i used other format and i got answer different from kit.can utell me where did i go wrong. discount rate 11%,tax 25%, ca-20%revenue 13250000 16695000 22788675 23928108.75
vc -5787600 -7292376 -9954093.24 -10451797.902
contibution 7462400 9402624 12834581.76 13476310.848
fc -900 -945 -992.25 -1041.8625
marketing exp -1500
taxable profit 14922400 18804303 25668171.27 26951579.8335
tax @25% -3730600 -4701075.75 -6417042.8175 -6737894.958375
tax saving 800000 640000 512000 409600
iv -16000000
wc -1025000 -41000 -53300 -55965 1175265
cfs -17025000 11950800 14689927.25 19707163.4525 21798549.875125
df 1.000 0.901 0.812 0.731 0.659
pv -17025000 10766486.4864865 11922674.4988231 14409708.0663571 14359379.9941895npv = 34433249.0458562
in kit npv answer was 7801000
where did i go wrong?
and y do v take fc in this?
Your approach to dealing with the tax is fine, but you have made a mistake in arriving at your taxable profit.
For example, at time 1 you should have got 7462400 – 1500000 = 900000 = 5062400.
I don’t know how you have arrived at your figures.The question implies that the fixed costs are those of the new facility and are therefore additional fixed costs and so are relevant.
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