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% |
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 |
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