Question

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

Answer 1

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