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 41,700 units, while the sale price is $113 per unit with a variable cost of $63 per unit. Annual fixed costs are estimated to $975,000. If the appropriate discount rate is 11.25% and the tax rate 30%, what is the project's NPV?
options: $1,829,512
$1,880,332
$1,931,151
$1,981,971
$2,032,791

Answer 1

Tax rate		30%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$    1,000,000	$   1,000,000	$    1,000,000	$    1,000,000	$   1,000,000
Dep Rate		20.00%	20.00%	20.00%	20.00%	20.00%
Depreciation	Cost * Dep rate	$       200,000	$      200,000	$       200,000	$       200,000	$      200,000	$    1,000,000
Calculation of after-tax salvage value
Cost of machine			$   1,000,000
Depreciation			$   1,000,000
WDV	Cost less accumulated depreciation	$                -
Sale price			$                -
Profit/(Loss)	Sale price less WDV	$                -
Tax	Profit/(Loss)*tax rate	$                -
Sale price after-tax	Sale price less tax		$                -
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
No of units		41,700	41,700	41,700	41,700	41,700
Selling price		$              113	$             113	$              113	$              113	$             113
Operating ost		$                63	$               63	$                63	$                63	$               63
Sale		$    4,712,100	$   4,712,100	$    4,712,100	$    4,712,100	$   4,712,100
Less: Operating Cost		$    2,627,100	$   2,627,100	$    2,627,100	$    2,627,100	$   2,627,100
Contribution		$    2,085,000	$   2,085,000	$    2,085,000	$    2,085,000	$   2,085,000
Less: Fixed cost		$       975,000	$      975,000	$       975,000	$       975,000	$      975,000
Less: Depreciation		$       200,000	$      200,000	$       200,000	$       200,000	$      200,000
Profit before tax (PBT)		$       910,000	$      910,000	$       910,000	$       910,000	$      910,000
Tax@30%	PBT*Tax rate	$       273,000	$      273,000	$       273,000	$       273,000	$      273,000
Profit After Tax (PAT)	PBT - Tax	$       637,000	$      637,000	$       637,000	$       637,000	$      637,000
Add Depreciation	PAT + Dep	$       200,000	$      200,000	$       200,000	$       200,000	$      200,000
Cash Profit after-tax		$       837,000	$      837,000	$       837,000	$       837,000	$      837,000
Calculation of NPV
						11.25%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$ (1,000,000)	$     (100,000)		$ (1,100,000)	1.0000	$ (1,100,000)
1				$       837,000	$       837,000	0.8989	$       752,360
2				$       837,000	$       837,000	0.8080	$       676,278
3				$       837,000	$       837,000	0.7263	$       607,891
4				$       837,000	$       837,000	0.6528	$       546,418
5		$                 -	$      100,000	$       837,000	$       937,000	0.5868	$       549,844
					Net Present Value	$    2,032,791
Hence the last option is the correct answer.