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 30,300 units, while the sale price is $95 per unit with a variable cost of $57 per unit. Annual fixed costs are estimated to $890,000. If the appropriate discount rate is 10.75% and the tax rate 30%, what is the project's NPV?

Answer 1

Total cost=working capital requirement+fixed asset investment=$100000+$1000000=$1100000

Again $100,000 working capital has to be added to Year5 cashflows due to its recovery in nature

All the formulas and how find the cashflows and NPV is given the below table

NPV can be calculated using NPV function in EXCEL

=NPV(rate, Year1 to Year5 cashflows)-Year0 cashflow

=NPV(10.75%,Year1 to Year5 cashflows)-$1100000

NPV=-$136,277