Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.7 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 $385,000. The project is expected to generate $2.5 million in annual sales, with annual expenses of $900,000. The project will require an initial investment of $435,000 in NWC that will be returned at the end of the project. The corporate tax rate is 21 and the project has a required return of 12 percent.

What is the NPV of the project?

Answer 1

The following is the Excel Worksheet of NPV Calculation for better understanding:-

( Here, in 1st year due to bonus depreciation, the net income got negative, so tax calculated on negative income is added back as tax credit will be received and it is an cash inflow. Therefore, reducing the amount of negative net income ( or post-tax negative income)

The below is the Formula Sheet of above Excel Worksheet for understanding of the formulas used:-

So, NPV of the project is $ 1,680,202.76