Question

- 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.

- What is the operating cash flow of the project? (10 points)

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

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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