Modern Flooring is considering a new product line. The new line would require $134,000 of fixed assets and net working capital of $24,000. The firm will apply straight-line depreciation to a zero salvage value over three years. The new line is expected to produce an operating cash flow of $35,000 the first year with that amount decreasing by 10 percent annually for two years before the new line will be discontinued. The fixed assets can be sold for $25,000 at the end of the project and all net working capital will be recovered. What is the net present value of the new line at a discount rate of 11.5 percent and a tax rate of 35 percent

-51,784

Explanation:

Net present value can be calculated by first calculating the present values of operating cash flows each year and the sum up all the present values.

Year                                    0                1             2              3

Operating CF                                    35000    31500     28350

Fixed asset                  -134000

Net working capital     -24000                                       24000

Disposal after tax                                                             16250

(25000x0.65)

Net cashflow                -158000       35000    31500    68600

PV Factor                           1               0.896     0.804      0.721

PV                                -158000        31390       25337     49488

NPV =  -158000  + 31390 + 25337  + 49488

NPV = -51,784

Workings

PV Factor

Year 0  =   1/(1.115)^0 = 1

Year 1  =   1/(1.115)^1 = 0.896          

Year 2  =   1/(1.115)^2 = 0.804

Year 3  =   1/(1.115)^3 = 0.721

d, conspicuous consumption is when you try to increase your wealth or social status (and in the case he's trying to create the perception of wealth considering he can't really afford it)