Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.65 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 $395,000. The project is expected to generate $2.45 million in annual sales, with annual expenses of $950,000. The project will require an initial investment of $420,000 in NWC that will be returned at the end of the project. The corporate tax rate is 22 and the project has a required return of 13 percent. What is the NPV of the project?

Answer 1

The NPV =1372618.02

Cash flows are as below:

Tax shield = 100%*Cost*Tax = 100%*2650000*22%

Salvage after tax = Salvage value*(1-Tax)

Net Revenue= (Revenue- cost)*(1-Tax)

Year	Initial cost	Tax shield	Salvage after tax	Net Revenue	Working capital	Cash flow
0	-2650000				-420000	-3070000
1		583000		1170000		1753000
2				1170000		1170000
3				1170000		1170000
4			308100	1170000	420000	1898100
					NPV	1372618.02

WORKINGS