Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $465,000. The project is expected to generate $3.3 million in annual sales, with annual expenses of $980,000. The project will require an initial investment of $515,000 in NWC that will be returned at the end of the project. The corporate tax rate is 22 and the project has a required return of 14 percent.

What is the NPV of the project?

Answer 1

Solution :-

Net Annual Savings = $3,300,000 - $980,000 = $2,320,000

After tax Salvage Value = $465,000 * ( 1 - 0.22 ) = $362,700

Therefore NPV of the Project = $2,291,358

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