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A company is considering a new project requiring an upfront fixed-asset investment of $1,000,000 with an...

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 optimistic-scenario forecast, the annual sales volume is 43,800 units, while the sale price is $114 per unit with a variable cost of $52 per unit. Annual fixed costs are estimated to $972,000. If the appropriate discount rate is 11.00% and the tax rate 30%, what is the project's NPV?​​​​​​​

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Expert Solution

Answer : Calculation of NPV

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial Investment 1000000
Annual Sales Revenue (43800*114) 4993200 4993200 4993200 4993200 4993200
Variable Cost (43800*52) 2277600 2277600 2277600 2277600 2277600
Less : Fixed Cost 972000 972000 972000 972000 972000
Less : Depreciation (1000000/5) 200000 200000 200000 200000 200000
Earning before taxes 1543600 1543600 1543600 1543600 1543600
Taxes @ 30% -463080 -463080 -463080 -463080 -463080
Earnings After Taxes 1080520 1080520 1080520 1080520 1080520
Add : Depreciation 200000 200000 200000 200000 200000
Less : Increase in Working Capial 100000
Add : Recapture of Working Capital 100000
Operating Cash Flows 1100000 1280520 1280520 1280520 1280520 1380520
PV Factor @ 11% 1 0.900901 0.811622 0.731191 0.658731 0.593451
PV of Net Cash flows (Inflow) 1153622 1039299 936305.2 843518.2 819271.4
PV of Net Cash flows (Outflow) 1100000
The net present value (NPV) of this project is         =    $ 3692015.182
NPV = PV of cash inflow - PV of cash outflow
        = 4792015.182- 1100000
        =    $ 3692015.182

jeff jeffy answered 1 year ago
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