C3. (Incremental cash flows and NPV) Ivan’s Onion-Brick Restaurant has been very successful
for 10 years. However, the growth potential in Ivan’s area has declined, and therefore Ivan
is contemplating investment in a new business line: consulting. Ivan can enter this new
field by purchasing and renovating a small building in downtown Newark at a cost of
$100,000, all of which will be depreciated on a straight-line basis to a zero book value over
10 years. Although it will be depreciated to a zero book value, the entire project is expected
to be sold off for a salvage value of $65,000 at the end of eight years. It is estimated that the
revenues from the project will be $100,000 per year during the next two years and
$150,000 in years 3 through 8. Variable costs (including all labor and material) will be 65%
of revenues. At the expected revenue levels, Ivan expects to average about $30,000 in receivables,
and accounts payable are expected to average $5,000. Ivan has determined that the
project’s cost of capital is 17.31%, and the tax rate is 35%. What is the NPV of this project?
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