Question

Your company is considering a new 4-year project that requires an initial fixed asset investment of $3.25 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year (which means can all be depreciated in year 1). At the end of the project, the asset can be sold for $440,000. The project is expected to generate $3.05 million in annual sales, with annual expenses of $955,000. The project will require an initial investment of $490,000 in NWC that will be returned at the end of the project. The corporate tax rate is 22 and the project has a required return of 11 percent.

What is the NPV of the project?

		2,522,705.29
		2,349,100.04
		342,000
		96,800

Answer 1

Time line		0	1	2	3	4
Cost of new machine		-3250000
Initial working capital		-490000
=Initial Investment outlay		-3740000
							100.00%
Sales			3050000	3050000	3050000	3050000
Profits	Sales-variable cost		2095000	2095000	2095000	2095000
-Depreciation			-3250000	0	0	0	0	=Salvage Value
=Pretax cash flows			-1155000	2095000	2095000	2095000
-taxes	=(Pretax cash flows)*(1-tax)		-900900	1634100	1634100	1634100
+Depreciation			3250000	0	0	0
=after tax operating cash flow			2349100	1634100	1634100	1634100
reversal of working capital						490000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					343200
+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						833200
Total Cash flow for the period		-3740000	2349100	1634100	1634100	2467300
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704
Discounted CF=	Cashflow/discount factor	-3740000	2116306.3	1326272.2	1194839.8	1625286.9
NPV=	Sum of discounted CF=	2522705.29