Question

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.83 million. The marketing department predicts that sales related to the project will be $2.53 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 30 percent of sales. The company also needs to add net working capital of $180,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return is 13 percent.
  
What is the NPV for this project?​

Answer 1

Calculation for NPV
Particulars	0	1	2	3	4
Sales Revenue		2.53	2.53	2.53	2.53
COGS and operating exp		0.759	0.759	0.759	0.759
EBITDA		1.771	1.771	1.771	1.771
Depreciation(3.83/4)		0.9575	0.9575	0.9575	0.9575
EBIT		0.8135	0.8135	0.8135	0.8135
EBIT(1-T)		0.528775	0.528775	0.528775	0.528775
FCFF		1.486275	1.486275	1.486275	1.486275
Discouting factor @ 13%		0.885	0.7831	0.6931	0.6133
Discounted FCFF		1.315353	1.163902	1.030137	0.911532
Cash Inflow(Total of Diiscounted Cash Inflow)					4.420925
Cash outflow					4.01
NPV					0.410925
Calculation of cash outflow:
cost of asset	3.83
change in WC	0.18
Cash outflow	4.01
All figures are in millions