Question

Fun With Finance is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.35 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $105,000. The project requires an initial investment in net working capital of $150,000. The project is estimated to generate $1,200,000 in annual sales, with costs of $480,000. The tax rate is 31 percent and the required return on the project is 17 percent. Required:

(a) What is the project's year 0 net cash flow? -1,500,000 Correct

(b) What is the project's year 1 net cash flow?

(c) What is the project's year 2 net cash flow?

(d) What is the project's year 3 net cash flow?

(e) What is the NPV?

Answer 1

Year 0 Net cash flow = - ( initial investment + Working capital investment ) = - ( 1350000 + 150000 )

-1500000

Sales	1200000
(-) Costs	480000
(-) Depreciation [ 1350000 / 3 ]	450000
Income beforet tax	270000
(-) Taxes @ 31%	83700
Net income	186300
(+) Depreciation	450000
Annual cash flow	636300

Year 1 Net cash flow = Annual cash flow	636300
Year 2 Net cash flow = Annual cash flow	636300
Year 3 Net cash flow = Annual cash flow + After tax salvage value + recovery of working capital = 636300 + 105000*(1-31%) + 150000 =	858750

Year	0	1	2	3
Net cash flow	-1500000	636300	636300	858750
(*) Present value factor @ 17%	1	0.854700855	0.730513551	0.624370556
Present value	-1500000.00	543846.15	464825.77	536178.22
NPV	44850.14