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 44,700 units, while the sale price is $121 per unit with a variable cost of $71 per unit. Annual fixed costs are estimated to $1,045,000. If the appropriate discount rate is 11.75% and the tax rate 30%, what is the project's NPV?

	$2,196,482
	$2,251,394
	$2,306,306
	$2,361,218
	$2,416,130

Answer 1

Years	0	1	2	3	4	5
Cost of fixed-asset investment	-1000000
Sales [ 44700*121 ]		5408700	5408700	5408700	5408700	5408700
(-) Fixed costs		1045000	1045000	1045000	1045000	1045000
(-) Variable costs [ 44700*71 ]		3173700	3173700	3173700	3173700	3173700
(-) Depreciation [ 1000000/5 ]		200000	200000	200000	200000	200000
Profit before tax		990000	990000	990000	990000	990000
(-) Taxes @ 30%		297000	297000	297000	297000	297000
Net income		693000	693000	693000	693000	693000
(+) Depreciation		200000	200000	200000	200000	200000
(+) Net working capital	-100000					100000
(+) After tax salvage value						0
Free cash flow	-1100000	893000	893000	893000	893000	993000
Present value factor @ 11.75%	1	0.894855	0.800765	0.716568	0.641224	0.573802
Present value	-1100000.00	799105	715083	639895	572613	569786
Net present value (NPV)	2196482