Question

Byers, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,680,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,950,000 in annual sales, with costs of $1,060,000. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 34 percent and the required return on the project is 14 percent.

Requirement 1:

What are the net cash flows of the project for the following years? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).)

Year	Cash Flow
0	$
1
2
3

Requirement 2:

What is the NPV of the project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

NPV

$

Answer 1

Requirement 1:-

Fixed investment =  $1,680,000

Working capital require = $150,000,

Tax rate = 34%

Required rate of return = 14%

Initial cost = Cost of fixed investment + Working capital requirement

= ($1680000 + $150000 )

= $1830,000

Annual sale =  $1,950,000

Annual cost =  $1,060,000

Revenue = ( $1,950,000 - $1,060,000 )

= $890,000

Net Revenue = $890000 ( 1 - 0.34 ) = $587400

Calculation of depreciation:- Cost of the assets / No of life

= $1680000 / 3

= $560,000 Annual depreciation

Tax benefit on depreciation = $560,000 ( 34% )

= $190,400

Net Working capital receive at the end of the 3 year =  $150,000 ( 1 - 0.34 ) = $99000

Profit on sale of fixed assets = ( Market value - Book value )

= ( $175,000 - 0 )

=   $175,000

Net profit on sale at the end of 3 year = $175,000 * ( 1 - 0.34 )

= $115,500

Cash flow in year 0 = $1830,000

Cash flow in year 1 = $587400 + $190,400 = $777800

Cash flow in year 2 = $587400 + $190,400 = $777800

Cash flow in year 3 = $587400 + $190,400 + $99000 + $115500 = $992300

Requirement 2.:-

NPV :- Present value of cash flow - Cash outflow

Present value of cash flow * Present value factor

Present value factor = 1 / ( 1 + r )¹

Year	Cash flow	Present value factor	Present value
1	$777,800	0.877	$682,130.60
2	$777,800	0.769	$598,128.20
3	$992,300	0.675	$669,802.50
Total			$1,950,061.30

N P V = $1,950,061.30 - $1830,000

= $120061.30