Question

WXY Co plans a new four-year expansion project that requires an initial fixed asset investment of $1.67 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a market value of $435,000. No bonus depreciation will be taken. The project requires an initial investment in net working capital of $198,000, all of which will be recovered at the end of the project. The project is estimated to generate $1,850,000 in annual sales, with costs of $1,038,000. The tax rate is 21 percent and the required return for the project is 16.4 percent. What is the net present value?

	1.	$302,208.15
	2.	$358,576.22
	3.	$254,595.45
	4.	$451,180.73
	5.	$241,334.55

Answer 1

Correct answer is option 4.451,180.73

Calculation of Net Presenr Value [ NPV ]

Annual cash flow calculation

Sales - Cost =1850,000-1038,000= 812,000

Less Depreciation [ 1.67/4] 417,500

Profit before tax 394500

Less Tax@21% 82,845

PAT 311655

Add Depreciation 417500

Operating cash flow 729,155

So, NPV = Present value of cash flows - Initial investment

= [ 729155*PVIFA,16.4%,3] + [ (729155+198,000+435000*(1-.21)*PVIF,16.4%,4] - [16,70,000+198,000]

=729155*2.231246 + 1270805*.544739 - 1868000

=16,26,924.31 + 692,257.42 - 1868000

=451,180.73

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)^n} / r], where “r” is Discount rate and “n” is the useful life of investment

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)^n], where “r” is Discount rate and “n” is the useful life of investment