Question

In: Finance

A company is considering a new project requiring an upfront fixed-asset investment of $1,000,000 with an...

A company is considering a new project requiring an upfront fixed-asset investment of $1,000,000 with an economic life of five years. Depreciation is taken on a straight-line basis, with no expected salvage value. Net working capital required immediately is expected to be $100,000 and will be recovered in full upon the project's completion in five years. In the expected-scenario forecast, the annual sales volume is 49,200 units, while the sale price is $133 per unit with a variable cost of $83 per unit. Annual fixed costs are estimated to $1,150,000. If the appropriate discount rate is 12.50% and the tax rate 30%, what is the project's NPV?

$2,373,314

$2,434,168

$2,495,022

$2,555,877

$2,616,731

Solutions

Expert Solution

Years 0 1 2 3 4 5
Cost of fixed-asset investment -1000000
Sales [ 49200*133 ] 6543600 6543600 6543600 6543600 6543600
(-) Fixed costs 1150000 1150000 1150000 1150000 1150000
(-) Variable costs [ 49200*83 ] 4083600 4083600 4083600 4083600 4083600
(-) Depreciation [ 1000000/5 ] 200000 200000 200000 200000 200000
Profit before tax 1110000 1110000 1110000 1110000 1110000
(-) Taxes @ 30% 333000 333000 333000 333000 333000
Net income 777000 777000 777000 777000 777000
(+) Depreciation 200000 200000 200000 200000 200000
(+) Net working capital -100000 100000
(+) After tax salvage value 0
Free cash flow -1100000 977000 977000 977000 977000 1077000
Present value factor @ 12.50% 1 0.888889 0.790123 0.702332 0.624295 0.554929
Present value -1100000.00 868444 771951 686178 609936 597658
Net present value (NPV) 2434168

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