Question

Bentley Mews is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be sold. Assume it will be sold for $231,000, its estimated market value at the end of four years. The project requires an initial investment in net working capital of $330,000, all of which will be recovered at the end of the project. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 30 percent and the required return for the project is 11.0 percent. What is the net present value for this project?

A) $1,082,378

B) $1,127,215

C) $1,202,965

D) $1,331,940

E) $1,825,500

Answer 1

Calculation of NPV

NPV = Present value of all cash inflows - Initial outlay

Calculation of Annual net cash inflow

Sales 2,640,000

Less Cost 1,056,000

Less Depreciation [ 3million / 4 ]750,000

Profit before tax 834,000

Less tax @30% 250200

Add Depreciaion 750,000

Annual net cash flow 1,333,800

NPV = 1,333,800*PVIFA,11%,3 + [1,333,800 +330,000+ (231,000*.70) ]*PVIF,11%,4 - 30,00,000+330,000

=1,333,800*2.443715 + 1,825,500*.658731 - 33,30,000

= 3,259,427.07 + 1,202,513.44 - 33,30,000

= 1,131,940 [ None of the options are correct ,please check the options once again ]

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)^n} / r], where “r” is Discount rate and “n” is the useful life of investment

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)^n], where “r” is Discount rate and “n” is the useful life of investment