Summer Thyme., is considering a new 5-year expansion project that requires an in

Question

Summer Thyme., is considering a new 5-year expansion project that requires an initial fixed asset investment of $3.51 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which it will be worthless. The project is estimated to generate $3,120,000 in annual sales, with costs of $1,248,000. The tax rate is 33 percent and the required return is 14 percent. The project requires an initial investment in net working capital of $390,000 and the fixed asset will have a market value of $273,000 at the end of the project.

What is the NPV?

Summer Thyme., is considering a new 5-year expansion project that requires an initial fixed asset investment of $3.51 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which it will be worthless. The project is estimated to generate $3,120,000 in annual sales, with costs of $1,248,000. The tax rate is 33 percent and the required return is 14 percent. The project requires an initial investment in net working capital of $390,000 and the fixed asset will have a market value of $273,000 at the end of the project.

What is the NPV?

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cash Flow = -3510000-390000 = -3900000

Annual Cash Flow = 3120000-1248000-3510000/5 = 1170000*(1-.33) + 3510000/5 = 1485900

NPV = -3900000 + 1485900/(1+.14)^1 + 1485900/(1+.14)^2 + 1485900/(1+.14)^3 + 1485900/(1+.14)^4 + 1485900/(1+.14)^5 + 390000/(1+.14)^5 + 273000*(1-.33)/(1+.14)^5 = 1498766.51

Answer is 1498766.51

Thanks.

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