Question

A company is considering a new project requiring an upfront fixed-asset investment of $1,000,000 with an economic life of five years. Depreciation is taken on a straight-line basis, with no expected salvage value. Net working capital required immediately is expected to be $100,000 and will be recovered in full upon the project's completion in five years. In the optimistic-scenario forecast, the annual sales volume is 58,200 units, while the sale price is $150 per unit with a variable cost of $88 per unit. Annual fixed costs are estimated to $1,260,000. If the appropriate discount rate is 13.25% and the tax rate 30%, what is the project's NPV?

Answer 1

Let us calculate operating cash flows for each year

Cost of investment is 1000000

Life is 5 years

So depreciation is 200000

Calculation of ocf

Sales is 58200×150 = 8730000

Variable cost =58200×88 = 5121600

Contribution is 3608400

Less fixed cost 1260000

Less depreciation 200000

PBt is 2148400

Less tax @30% = 644520

Pat is 1503880

Add depreciation 200000

Ocf is 1703880

Initial investment is 1100000

Terminal cash flow is 100000(working capital)

Npv is present value of cash flows less initial investment

P.v is

1703880(PVIFA 13.25% 5 y) + 100000/(1.1325)^5

= 1703880(3.4959) + 53680

= 6010274

Less initial investment 1100000

So npv is 4910274