Question

A firm has the following project (assume that the expenditures are at the end of the year in question):
1) The land will be acquired for $ 500,000 in year zero
2) The first year, $ 1 million will be spent on the construction of the plant.
3) The equipment will be purchased on year 2 at a cost of $1.5 million.
4) The third year, $ 500,000 will be disbursed to start operating the plant.
5) The plant and equipment will depreciate in a straight line for the next 10 years, beginning year 4 (project ends in year 13). The equipment and the physical construction will be worthless after these 10 years, but the land can be sold at its original cost, when the plant is closed.
6) The annual income (during the 10 years, that is, from the 4th to the 13th year) is 2 million.
7) The annual fixed cost (excluding depreciation) will be $ 200,000
8) The variable costs are annually of $ 300,000, assuming that the plant operates at its maximum capacity during the 10 years
9) The tax rate will be 50 percent as it will be treated as if it were a private business of the state itself (i.e. treat the state as a company, that is, pure neoliberalism)

Calculate the Net Present Value of the Project, if the discount rate is 14%.

Answer 1

Year	Revenue (1)	Fixed Cost (Exl Depn) (2)	Variable Cost (3)	Deprecation (4)	Net Income Before Tax (5) = (1-2-3-4)	Net Income after Tax (6) =(5*50%)	Investment (7)	Working of Cashflow	Cash Flows (8)	DF @ 14% (9)	Present Value (10) = (8*9)
0	-	-	-	-	-	-	(500,000)	7 - (500000)	(500,000)	1	(500,000)
1	-	-	-	-	-	-	(1,000,000)	7 - (1000000)	(1,000,000)	0.877192982	(877,193)
2	-	-	-	-	-	-	(1,500,000)	7 - (1500000)	(1,500,000)	0.769467528	(1,154,201)
3	-	-	-	-	-	-	(500,000)	7 - (500000)	(500,000)	0.674971516	(337,486)
4	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.592080277	503,268
5	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.519368664	441,463
6	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.455586548	387,249
7	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.399637323	339,692
8	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.350559055	297,975
9	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.307507943	261,382
10	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.26974381	229,282
11	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.236617377	201,125
12	2,000,000	200,000	300,000	200,000	1,300,000	650,000		(6+4) --(650000+200000)	850,000	0.207559102	176,425
13	2,000,000	200,000	300,000	200,000	1,300,000	650,000	500,000	(6+4+7)--(650000+200000+500000)	1,350,000	0.182069388	245,794
										NPV	214,775

Calculation of Depreciation on Plant & Equipment

(15,00,000+5,00,000)/10

200,000

Tax shield on depn every year from 4 th year = 200,000*50%

NPV of the project is $214,775.