Question

XYZ Inc. is considering a three-year project. The initial investment on the fixed asset will be $900,000. Fixed asset will be depreciated using straight-line method to zero over the life of the project. The net working capital investment will be $250,000. The project is estimated to generate $500,000 in annual sales, with cost of $150,000. Assume the tax rate is 34% and required return is 10%, what is the NPV of this project?

Group of answer choices

$302,570

$170,518

-$321,878

Answer 1

Initial Investment	900000
NWC	250000
Initial outflow	1150000
Depreciation amount	300000	Initial investment / no of years

Year	sales	cost	Depreciation	EBIT	Tax	EBT	Depreciation	NOPAT	PV of cashflow discount at 10%
1	500000	150000	300000	50000	17000	33000	300000	333000	$302,727.27
2	500000	150000	300000	50000	17000	33000	300000	333000	$275,206.61
3	500000	150000	300000	50000	17000	33000	300000	333000	$250,187.83
3	250000								$187,828.70
Pv of cashflow	$1,015,950.41

net working capital is recovered at end of 3 year
NPV = Pv of inflow - ouflow
NPV = 1015950.41 - 1150000
NPV = -134050

Note - Pv of cashflow is calculated as -
=PV(rate,nper,pmt,[fv],type)
Tax is calculated on EBIT @ 34%
NOPAT = EBT + Depreciation