Question

Calculating Project NPV Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3,950,000. 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 $3,175,000 in annual sales, with costs of $1,455,000. The tax rate is 35 percent and the required return is 10 percent. What is the Project's NPV?

Answer 1

Annual Operating Cash Flow (OCF)

Operating Cash Flow (OCF) = [(Annual Sales - Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($3,175,000 - $1,455,000) x (1 – 0.35)] + [($3,950,000 / 3 Years) x 0.35]

= [$1,720,000 x 0.65] + [$13,16,666.67 x 0.35]

= $1,118,000 + $4,60,833.33

= $1,578,833.33 per year

Net Present Value of the Project

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	15,78,833.33	0.90909091	1,435,303.03
2	15,78,833.33	0.82644628	1,304,820.93
3	15,78,833.33	0.75131480	1,186,200.85
TOTAL			3,926,324.81

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $3,926,324.81 - $3,950,000

= -$23,675.19 (Negative NPV)

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.