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You are considering a new five-year project that requires an initial fixed asset investment of $5...

  1. You are considering a new five-year project that requires an initial fixed asset investment of $5 million. The fixed asset will be depreciated straight-line to zero over its five-year tax life, after which time it will be worthless. The project is estimated to generate $4.5 million in annual sales, with costs of $2 million. Assume the tax rate is 30 percent and the required return on the project is 15 percent.
  1. What is the operating cash flow of the project? (10 points)

b.What is the project’s NPV? (10 points)

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Answer #1

Depreciation = 5,000,000 / 5 = 1,000,000

Operating cash flow = 2,050,000 x 5 = 10,250,000

NPV = 1,871,917.95(rounded to two decimals)

(formula for NPV can be seen in the formula bar)

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