Question

.Squaw Valley Recreation is in the process of analyzing a new three year project to grow their business. At the beginning of this project, Squaw Valley will need to spend $2,460,000 to build the required fixed asset. This asset will have a depreciation period of three-years and will use the straight-line method of depreciation and it will be depreciated to zero. The asset will have no salvage value at the end of the project. This new project will have an estimated annual sales amount of $2,950,000. The estimated annual costs for this project are $1,970,000. The appropriate tax rate to use for this analysis is 22 percent. The CFO of Squaw Valley has indicated that the required return for this project is 9 percent. Calculate the NPV for this project. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is are calculated using NPV function in Excel

NPV is -$68,432.80

1 2 3 $2,460,000 2 Initial Investment 3 Cost of fixed asset 4. 5 OCF 6 Revenues 7 - Costs 8 - Depreciation 9 EBIT 10 - Taxes 11 Income after tax 12 + Depreciation 13 OCF 14 15 NPV Analysis 16 Project Cash Flows 17 18 NPV $2,950,000 $1,970,000 $820,000 $160,000 $35,200 $124,800 $820,000 $944,800 $2,950,000 $1,970,000 $820,000 $160,000 $35,200 $124,800 $820,000 $944,800 $2,950,000 $1,970,000 $820,000 $160,000 $35,200 $124,800 $820,000 $944,800 ($2,460,000) $944,800 $944,800 $944,800 $(68,432.80)