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

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

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