Calculating project NPV. Phone Home, Inc. is considering a new 4-year expansion

Question

Calculating project NPV. Phone Home, Inc. is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will have a market value of $225,000. The project requires an initial investment in net working capital of $330,000, all of which will be recovered at the end of the project. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 33 percent and the required return for the project is 15 percent. What is the net present value for this project?

Explanation / Answer

Calculation of annual cash flows and investment costs are as follows.        Cash flows Initial investment Asset value Sales 2640000 3000000 114847.8259 Less: Costs 1056000 188678.571 Operating profit 1584000 Less: dep 750000 EBT 834000 Less:Taxes 575460 Add: Dpe 1325460 PV $3,784,159.62 3188678.57    NPV   = PV + Asset value - Intial investment              = $3,784,159.62 + 11,4847.82 - 3,188,678.57              =$710,330.87    This is almost equals to First option. Because i had left some fractonal values after the decimals due to this it was nearer to first option. Cash flows Initial investment Asset value Sales 2640000 3000000 114847.8259 Less: Costs 1056000 188678.571 Operating profit 1584000 Less: dep 750000 EBT 834000 Less:Taxes 575460 Add: Dpe 1325460 PV $3,784,159.62 3188678.57

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