Question

A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash flow of $150,000 per year for three years. The asset value will be depreciated using straight-line depreciation over three years.At the end of the project, the asset could be sold for a price of $100,000. Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project.

Answer 1

- Initial Investment at (t=0) = $300,000

- After-tax Operating cashflow for 3 years = $150,000 per year

After-tax Operating cashflow are already computed after tax and depreciation.

- Salvage Value at year end 3 after tax adjustment = $100,000*(1-0.21%) = $79,000

calculating the NPV of the Project:-

Year	Cash Flow of Project ($) (a)	PV Factor @15% (b)	Present Value of cash Flows of Project ($) [(a)*(b)]
0	(300,000.00)	1.00000	(300,000.000)
1	150,000.00	0.86957	130,434.783
2	150,000.00	0.75614	113,421.550
3	150,000.00	0.65752	98,627.435
3	79,000.00	0.65752	51,943.782
			94,427.55

NPV of the Project is $94,427.55

Note- PV Factor@15% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.15)^n

where, n = Respective year.

For example, PV Factor@15% of 2nd year = 1/(1+0.15)^2 = 1/1.3225 = 0.75614

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