Question

Air Taxi, Inc. is considering a new 3-year expansion project that requires an initial fixed asset investment of $1,129,000 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 $1,210,000 with a cost of $450,000. The tax rate is 34% percent and the required rate of return is 14% percent.

What is the project NPV?

Asset investment	$1,129,000
Estimated annual sales	$1,210,000
Costs	$ 450,000
Tax rate	34%
*Depreciation straight-line to zero over tax life	3
Required return	14%

Answer 1

Computation of Project NPV- Air Taxi-
Particular	Time	PVF @14%	Amount	PV
Cash ouflow	0	1.0000	-$1,129,000	-$1,129,000
Cash Inflow	1	0.8772	$629,553	$552,239
	2	0.7695	$629,553	$484,421
	3	0.6750	$629,553	$424,930
NPV				$332,590

Computation of Annual Cash Flow After Tax
Sales	$1,210,000
Cost	-$450,000
EBT befre Depreciation	$760,000
Less: Depreciation	$376,333
(1129000/3)
EBT	$383,667
Less: Tax @ 34%	$130,447
EAT	$253,220
Add: Depreciation	$376,333
CFAT	$629,553