Answer (B) is correct . The first step is to calculate the annual cash flows from the project for the base case (the expected values). These may be calculated as shown: Value Description How calculated ($ in millions) ? 1. Revenues 90,000 × 0.30 × $800 21.600 2. Variable cost 90,000 × 0.30 × $400 10.800 3. Fixed cost $4,000,000 4.000 4. Depreciation $20,000,000 ÷ 8 2.500 5. Pretax profit Item 1 – (Items 2 + 3 + 4) 4.300 6. Tax Item 5 × 0.35 1.505 7. Net profit Item 5 – Item 6 2.795 8. Net cash flow Item 7 + Item 4 5.295 This level of cash flow occurs for each of the 8 years of the project. The present value of an 8-year, $1 annuity is 4.639 at 14%. The NPV of the project is therefore given by:
Answer (A) is incorrect because The amount of $2,626,415 used the wrong discount factor.
Answer (C) is incorrect because It failed to consider depreciation.
Answer (D) is incorrect because It failed to consider depreciation and other fixed costs.
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Assume that Oxford employs straight-line depreciation, and that they are taxed at 35%. Assuming an opportunity cost of capital of 14%, what is the NPV of this project, based on expected outcomes?