Air Taxi, Inc. is considering a new 3-year expansion project that requires an in

Question

Air Taxi, Inc. is considering a new 3-year expansion project that requires an initial fixed asset investment of $1,400,000 million dollars. The asset will be depreciated over a 3 year tax life and have no salvage value. The project is estimated to have annual cash flows of $1,120,000 with a cost of $480,000. The tax rate is 35% and the required rate of return is 12% percent. What is the project NPV? Asset investment Estimated annual sales Costs Tax rate $1,400,000 $1,120,000 $ 480,000 35% Depreciation straight-line to zero over tax life 3 Required return 12% $(417,520.36) o $(8,539.09) $12,791,460.91) $554,902.40

Explanation / Answer

Correct answer is option B (8539.09)

Calculation of Annual Cash Flow

Sales 11,20,000

(-) Cost (480,000)

Net 640,000

(-) Depreciation

(14,00,000/3) (466,667)

Income after Depreciation 173,333

(-) Tax@35% (60,667)

Cash flow after tax 112,666

Add: Depreciation 466,667

Net Annual cash flow 5,79,333

NPV = 579,333*PVAF@12%,3years -14,00,000

=579,333*2.4018 -14,00,000

=13,91,461-14,00,000

= (8539)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.