A project has an initial cost of $1,000,000 and is expected to last for 2 years....

A project has an initial cost of $1,000,000 and is expected to last for 2 years. In year 1, depreciation charge will be $100,000 and earnings are expected to be $164,747. In year 2, depreciation will be $100,000 and earnings are expected to be $208,905. Assume the required return is 8%. What is the value of this project?

Expert Solution


Value of project is $17,516.94
Statement showing Cash flows
Particulars	Time	PVf 8%	Amount	PV
Cash Outflows	-	1.00	(1,000,000.00)	(1,000,000.00)
PV of Cash outflows = PVCO				(1,000,000.00)
Cash inflows	1.00	0.9259	164,747.00	152,543.52
Cash inflows	2.00	0.8573	208,905.00	179,102.37
Cash inflows	2.00	0.8573	800,000.00	685,871.06
PV of Cash Inflows =PVCI				1,017,516.94
NPV= PVCI - PVCO or value of project				17,516.94

Note
There is no tax saving on depreciation as tax rates are not given
Terminal value =1,000,000-100,000 - 100,000	800,000.00

jeff jeffy answered 1 year ago

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