Question

A three-year project will cost $150,000 to construct. This will be depreciated straight line to zero over the three-year life. The project is expected to generate sales of $450,000 per year. It has annual variables costs of $200,000 and annual fixed costs of $100,000 per year. The appropriate tax rate is 25 percent and the required rate of return on the project is 16 percent. Assume that a salvage company will pay $60,000 (before taxes) for the assets at the end of year 3. The project also has an initial net working capital requirement of $40,000, which is fully recoverable when the project ends. Note that the project only depreciates the $150,000 initial cost. The salvage value is excluded from depreciation. What is the project’s net present value (NPV)?

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3
Sales	-	450,000	450,000	450,000
Less: Variable Costs	-	200,000	200,000	200,000
Profit Before Depreciation	-	250,000	250,000	250,000
Less: Depreciation	-	50,000	50,000	50,000
Profit before Tax	-	200,000	200,000	200,000
Less: Tax at 25%	-	50,000	50,000	50,000
Profit after tax	-	150,000	150,000	150,000
Add back Depreciation	-	50,000	50,000	50,000
Cash Flow from operations	-	200,000	200,000	200,000
Initial Investment	-150000	-	-	-
Net Working Capital	-40000	-	-	40,000
After tax cash flow from sale of assets	-	-	-	45,000
Net Cash flow	-190000	200,000	200,000	285,000
Discount Factor at 16%	1	0.86206897	0.7431629	0.64065767
Discounted Cash flow	-190000	172413.793	148632.58	182587.437
NPV =	313,633.81

Excel Formulas:

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