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 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?​​​​​​​

Answer 1

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