Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.65 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 $460,000. The project is expected to generate $3.25 million in annual sales, with annual expenses of $975,000. The project will require an initial investment of $510,000 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 15 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: We will have to calculate the Cash flow and then Discount it to calculate the present value using the formula

Cash Flow/(1 + Discount rate)^ (no of years)

Discount rate =15%

tax rate =21%

Year	0	1	2	3	4
Initial Investment	-3.65
Sales		3.25	3.25	3.25	3.25
Annual Expenses		0.975	0.975	0.975	0.975
Increase in NWC	-0.51				0.51
Depreciation (100% in Year 1)		3.65	0	0	0
Salvage value		0	0	0	0.46
Taxable income(Sale- Expense- Dep. + Salvage value + NWC)		-1.375	2.275	2.275	3.245
Tax(21% of taxable income)		0	0.47775	0.47775	0.68145
PAT(Taxable Income - tax)	-4.16	-1.375	1.79725	1.79725	2.56355
Cash Flow(Add back Depreciation)	-4.16	2.275	1.79725	1.79725	2.56355
Present value (Cash Flow/(1+0.15)^(no of year)	-4.16	1.978261	1.358979	1.181721	1.465718
NPV (Sum of all Present values)	1.824679

As the NPV is Coming out to be Positive it is profitable to pursue this project.