Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.5 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $445,000. The project is expected to generate $3.1 million in annual sales, with annual expenses of $960,000. The project will require an initial investment of $495,000 in NWC that will be returned at the end of the project. The corporate tax rate is 23 and the project has a required return of 12 percent. What is the NPV of the project?

Answer 1

Particular	Year 0	Year 1	Year 2	Year 3	Year 4	Total
Investment	(3,500,000.00)					(3,500,000.00)
working Capital	(495,000.00)					(495,000.00)
Sale Value		3,100,000.00	3,100,000.00	3,100,000.00	3,100,000.00
Less: Expenses		960,000.00	960,000.00	960,000.00	960,000.00
Less: Depreciation		3,500,000.00	-	-	-
EBT		(1,360,000.00)	2,140,000.00	2,140,000.00	2,140,000.00
Less; Tax at 23%		(312,800.00)	492,200.00	492,200.00	492,200.00
EAT		(1,047,200.00)	1,647,800.00	1,647,800.00	1,647,800.00
Add: Depreciation		3,500,000.00	-	-	-
Add: Working Capital					495,000.00
Add: Sale of asset after tax (445000 x (100-23%)					342,650.00
Cash Flow		2,452,800.00	1,647,800.00	1,647,800.00	2,485,450.00
PVF at 12%	1.00	0.89	0.80	0.71	0.64
Present Value	-	2,190,000.00	1,313,616.07	1,172,871.49	1,579,548.41	6,256,035.97
NPV						2,261,035.97