Question

A project requires an initial capex of $200,000 (at t=0) and is expected to produce revenues of $300,000 per year and costs of $180,000 per year for two years (that is, at t = 1 and t = 2). The corporate tax rate is 30%. The assets will be depreciated using the MACRS 3-year schedule:

Year	Depreciation Percentage
1	33%
2	45%
3	15%
4	7%

WACC is 12%. Assume that the capital asset will sell for book value at the end of two years. There is no change in net working capital. Calculate the NPV of the project. (HINT: in the FCF calculation, EBIT = revenue - costs - depreciation.)

		$22,463
		$19,315
		$16,244
		$5,721

Answer 1

Answer is $16,244

Initial Investment = $200,000

Year 1:

Depreciation = 33% * $200,000
Depreciation = $66,000

EBIT = Revenue - Costs – Depreciation
EBIT = $300,000 - $180,000 - $66,000
EBIT = $54,000

Free Cash Flow = EBIT * (1 - tax) + Depreciation
Free Cash Flow = $54,000 * (1 - 0.30) + $66,000
Free Cash Flow = $103,800

Year 2:

Depreciation = 45% * $200,000
Depreciation = $90,000

EBIT = Revenue - Costs - Depreciation
EBIT = $300,000 - $180,000 - $90,000
EBIT = $30,000

Free Cash Flow = EBIT * (1 - tax) + Depreciation
Free Cash Flow = $30,000 * (1 - 0.30) + $90,000
Free Cash Flow = $111,000

Book Value of Asset = $200,000 - $66,000 - $90,000
Book Value of Asset = $44,000

Salvage Value = $44,000

NPV = -$200,000 + $103,800/1.12 + $111,000/1.12^2 + $44,000/1.12^2
NPV = $16,244

NPV of the project is $16,244