Question

A $4 million investment today, in a project to last 10 years, is believed to result in the following incremental cash flows: annual increase in sales of $2,100,000 operating expenses will be 50% of sales there is no NWC investment associated with this project assets purchased for this project are depreciated to zero value using straight-line over the project's complete life market value of assets at end of life are expected to be $0 firm's marginal tax rate is 32% required return on the project is 14% compounded annually What is the NPV of this project?

Answer 1

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Dep per anum = Cost / Useful Life

= $ 4000000 / 10

= $ 400000

Annual Cash flow = EAT + dep

Particulars	Amount	Formula	Calculation
Sales	$    2,100,000.00	Given
Cost	$    1,050,000.00	Sales* 50%	2100000*50%
EBDIT	$    1,050,000.00	Sales - Cost	2100000 - 1050000
Dep	$       400,000.00	Cost / Life	4000000/10
EBIT	$       650,000.00	EBDIT - Dep	1050000 - 400000
Int	$                        -	Given
EBT	$       650,000.00	EBIT - Int	650000 - 0
Tax	$       208,000.00	EBT * Tax rate	650000 * 32 %
EAT or Net Income	$       442,000.00	EBT - Tax	650000 - 208000
Cash flow	$       842,000.00	EAT + Dep	442000 + 400000

NPV:

Year	Cash Flow	PVF @14 %	Disc CF
0	$         -4,000,000.00	1.0000	$        -4,000,000.00
1 - 10	$              842,000.00	5.2161	$         4,391,969.37
NPV			$            391,969.37

NPV of Project is $ 391969.37

PVAF = SUm [ PVF(r%, n) ]
PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per period
n = No. of periods

How to calculate PVAF using Excel:
=PV(Rate,NPER,-1)
Rate = Disc Rate
NPER = No.of periods