Question

A firm is deciding on a new project. Use the following information for the project evaluation and analysis: - The initial costs are $450,000 for fixed assets. The fixed assets will be depreciated straight line to a zero book value over the 3-year life of the project. The fixed assets have an estimated salvage value of $30,000 at the end of the project. - The project also requires an additional $100,000 for net working capital to start the project. All of the net working capital will be recouped at the end of the 3 years. - The project is expected to generate annual sales of $1,000,000 (1,000 units at $1,000) and total costs of $550,000 per year - The firm’s marginal tax rate is 40 percent. - The required rate of return for this project is 20% a) What is the Operating Cash Flow for each year of the project? b) What is the after-tax salvage value at the end of this project? c) What are the Cash Flows from Assets each year for this project? Year 0 1 2 3 OCF ΔNWC NCS CFFA d) What is the NPV of this project?

Answer 1

The project should be accepted since the NPV is positive.