Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.1 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 $425,000. The project is expected to generate $2.9 million in annual sales, with annual expenses of $940,000. The project will require an initial investment of $475,000 in NWC that will be returned at the end of the project. The corporate tax rate is 24 and the project has a required return of 14 percent.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Ref	Particulars		Year 1	Year 2	Year 3	Year 4
a	Operating cash flow		$ 1,960,000.00	$         1,960,000.00	$ 1,960,000.00	$ 1,960,000.00
	Gain on sale of asset					$    425,000.00
b	Depreciation		$(3,100,000.00)	$                             -	$                     -	$                     -
c=a-b	Profit before tax		$(1,140,000.00)	$         1,960,000.00	$ 1,960,000.00	$ 2,385,000.00
	Less: taxes		$   (273,600.00)	$            470,400.00	$    470,400.00	$    572,400.00
	Profit after tax		$   (866,400.00)	$         1,489,600.00	$ 1,489,600.00	$ 1,812,600.00
	Add: depreciation		$ 3,100,000.00	$                             -	$                     -	$                     -
	Less: gain on sale of asset				$                     -	$   (425,000.00)
	Add: working capital+ sale proceeds of asset		$                      -	$                             -		$    475,000.00
	Cash flow after tax		$ 2,233,600.00	$         1,489,600.00	$ 1,489,600.00	$ 1,862,600.00
d	Present value factor@ 14.0%		0.877192982	0.769467528	0.674971516	0.592080277
e=c*d	Present value of annual cashflows		$ 1,959,298.25	$         1,146,198.83	$ 1,005,437.57	$ 1,102,808.72
	Total present value of annual cash inflows		$ 5,213,743.37
	Less: investment		$ 3,100,000.00
	Working capital		$     475,000.00
	NPV		$ 1,638,743.37

Answer is $1,638,743.37

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