Question

The information of a mining project for a life of three years is given below:

Additional data: Applicable tax rate = 30% 
Discount rate = 10% 
Depreciation method: Straight line with zero salvage value

Hint:

While calculating NPV with straight line depreciation, always add depreciation back to net income to get actual cash flow, and then apply the discounting.

Answer 1

Correct Answer: 73

Step 1: Calculate annual depreciation. \[ {Depreciation per year} = \frac{300}{3} = 100 { Cr} \] Step 2: Compute net income and tax for each year. Year 1: \[ {EBIT} = 200 - 30 - 100 = 70 { Cr} \] \[ \Rightarrow \quad {Tax} = 0.30 \times 70 = 21 { Cr} \] \[ \Rightarrow \quad {Net Income} = 70 - 21 = 49 { Cr} \] \[ \Rightarrow \quad {Cash Flow} = 49 + 100 = 149 { Cr} \] Year 2: \[ {EBIT} = 300 - 40 - 100 = 160 { Cr} \] \[ \Rightarrow \quad {Tax} = 0.30 \times 160 = 48 { Cr} \] \[ \Rightarrow \quad {Net Income} = 160 - 48 = 112 { Cr} \] \[ \Rightarrow \quad {Cash Flow} = 112 + 100 = 212 { Cr} \] Year 3: \[ {EBIT} = 400 - 35 - 100 = 265 { Cr} \] \[ \Rightarrow \quad {Tax} = 0.30 \times 265 = 79.5 { Cr} \] \[ \Rightarrow \quad {Net Income} = 265 - 79.5 = 185.5 { Cr} \] \[ \Rightarrow \quad {Cash Flow} = 185.5 + 100 = 285.5 { Cr} \] Step 3: Discount the cash flows to present value. \[ {PV}_{1} = \frac{149}{(1.10)^1} = 135.45 { Cr} \] \[ {PV}_{2} = \frac{212}{(1.10)^2} = 175.06 { Cr} \] \[ {PV}_{3} = \frac{285.5}{(1.10)^3} = 224.49 { Cr} \] Step 4: Calculate NPV. \[ {NPV} = -300 + 135.45 + 175.06 + 224.49 = \boxed{235 { Cr}} \]