Question

Solve with financial calculator, not exel. Please include steps

1. Emerald Isle is an on-line retailer in California that is considering a new six-year expansion project that would greatly increase its capacity to import and distribute high quality hand-made items from Ireland. The project will require an initial fixed asset investment of $1.6 million. The fixed asset will be depreciated straight–line to zero over its six-year tax life. The fixed asset will have a market value of $250,000 at the end of the project. The project will also require an initial investment in net working capital of $200,000 that will be returned at the end of the project. The project is estimated to generate $1,450,000 in annual sales with costs of $950,000. The tax rate for the firm is 30%. The required return for firm investments is 15%. What is the NPV of this project? What is the IRR?

Answer 1

Year (t)	Value of Asset	Depreciation (straight line)D : asset/6	Salvage value	Net Working Capital (NWC)	Annual sale	Annual Cost	Before Tax cash Flow (BTCF) = (Annual sales -Cost + Salvage value)	Taxable Income = (BTCF - depreciation)	Income taxes = (Taxable Income *30%)	After tax cash flow (ATCF) = (BTCF - Income tax)	PV of after tax cash flow @15%= ATCF/ (1+15%)^t
0	$1,600,000	N/A		$200,000				0	0	-$1,800,000	-$1,800,000.00
1		$266,666.67			$1,450,000	$950,000	$500,000	$233,333	$70,000	$430,000	$373,913.04
2		$266,666.67			$1,450,000	$950,000	$500,000	$233,333	$70,000	$430,000	$325,141.78
3		$266,666.67			$1,450,000	$950,000	$500,000	$233,333	$70,000	$430,000	$282,731.98
4		$266,666.67			$1,450,000	$950,000	$500,000	$233,333	$70,000	$430,000	$245,853.90
5		$266,666.67			$1,450,000	$950,000	$500,000	$233,333	$70,000	$430,000	$213,786.00
6		$266,666.67	$250,000	$200,000	$1,450,000	$950,000	$750,000	$483,333	$145,000	$805,000	$348,023.71
NPV (sum of PVs)											-$10,549.59
IRR										14.80%

Project is not viable as NPV is negative and IRR is below the required rate of return

Formulas used in excel calculation: