Question

Your company is considering a 4-year expansion project that requires an initial fixed asset investment of $157,000. The fixed asset will be depreciated straight-line to zero over its 4-year life. The project is estimated to generate $150,000 in annual sales, with costs of $52,000. The project requires an initial investment in net working capital of $15,000, and the fixed asset will be sold for $13,000 at the end of the project. The tax rate is 25%, and the required return is 11%. Find the NPV of the project. Round your answer to the nearest dollar, for example 10789.

Answer 1

1.Straight Line Depreciation = $36,000 per year

Straight Line Depreciation for each year

= [ Cost of the machine – Salvage Value ] / Useful life

= [$157000-13000 ] / 4 Years

= $36,000 per year

2.Expected Net Income and Net cash Flow

EXPECTED NET INCOME
Revenues
Sales		1,50,000
Expenses
Cost	52,000
Straight Line Depreciation	36,000
		88,000
Income Before Taxes		62,000
Income Tax Expense@25%		$15,500
Net Income		$ 46,500
EXPECTED CASH FLOW
Net Income		$ 46500
Straight Line Depreciation		$36000
Expected Cash Flow		$82500

Chart values are based on
	N=	11%
	I=	4 Years
Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$82500	3.1024	$2,55,952
Residual Value	Present Value of $1	$13,000+15000=28000	0.6587	$18,444
	Present Value of cash inflows			$2,74,396
	Present Value of cash outflows	157,000+15000=172000		$172000
	Net Present Value			$1,02,396