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 pessimistic-scenario forecast, the annual sales volume is 24,300 units, while the sale price is $75 per unit with a variable cost of $37 per unit. Annual fixed costs are estimated to $690,000. If the appropriate discount rate is 9.50% and the tax rate 30%, what is the project's NPV?

	-$178,763
	-$183,232
	-$187,701
	-$192,170
	-$196,639

Answer 1

Answer : Correct Option is - $178,763

Below is the table showing calculation of NPV

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment	1000000
Annual Sales Revenue (24300*75)		1822500	1822500	1822500	1822500	1822500
Variable Cost (24300*37)		899100	899100	899100	899100	899100
Less : Fixed Cost		690000	690000	690000	690000	690000
Less : Depreciation (1000000/5)		200000	200000	200000	200000	200000
Earning before taxes		33400	33400	33400	33400	33400
Taxes @ 30%		-10020	-10020	-10020	-10020	-10020
Earnings After Taxes		23380	23380	23380	23380	23380
Add : Depreciation		200000	200000	200000	200000	200000
Less : Increase in Working Capial	100000
Add : Recapture of Working Capital						100000
Operating Cash Flows	1100000	223380	223380	223380	223380	323380
PV Factor @ 9.50%	1	0.913242	0.834011	0.761654	0.695574	0.635228
PV of Net Cash flows (Inflow)		204000	186301.4	170138.2	155377.4	205419.9
PV of Net Cash flows (Outflow)	1100000
The net present value (NPV) of this project is		=   - $ 178763.0847 or - $ 178763
NPV = PV of cash inflow - PV of cash outflow
= 921236.9153- 1100000
=   - $ 178763.0847 or - $ 178763