Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $385,000. The project is expected to generate $2.5 million in annual sales, with annual expenses of $900,000. The project will require an initial investment of $435,000 in NWC that will be returned at the end of the project. The corporate tax rate is 21 and the project has a required return of 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Annual Operating cashflows
Annual revenues		2500000
Less: Annual cost		900000
Annual income before tax		1600000
Less: tax @ 21%		336000
After tax Income		1264000
Annual Operating cashflows			1264000
Multiply: Annuity PVF at12% for 4yrs			3.03735
Present value of inflows				3839210
tax shield on dep (2700000*21%)0.635518				360338.7
WC investment release (435000*0.635518)				276450.3
After tax salvage (385000*79%*0.635518)				193292.8
Total inflows				4669292
Less: Investment (2700000+435000)				-3135000
NPV				1534292
Answer is 1534292