Question

In: Finance

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 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?

Question 5 options:

-$126,056

-$129,463

-$132,870

-$136,277

-$139,684

Solutions

Expert Solution

NPV = -$136,277

  • Depreciation is a non-cash expense. Hence it is added back to arrive at cash flow after tax. It is only considered to compute tax expense.

  • Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of an investment project.
  • NPV is used to evaluate investment projects in capital budgeting.
  • A project with a positive NPV is accepted. A positive NPV indicates that the project will result in net cash inflows in today's dollars.
  • A project with a negative NPV is rejected. A negative NPV indicates that the project will result in net cash outflows in today's dollars.
  • The cash flows are discounted at a required rate of return. It may be a weighted average cost of capital, cost of debt, etc.

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