Question

Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.85 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 $400,000. The project is expected to generate $2.65 million in annual sales, with annual expenses of $915,000. The project will require an initial investment of $450,000 in NWC that will be returned at the end of the project. The corporate tax rate is 24 and the project has a required return of 15 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		2650000
Less: Annual cost		915000
Annual income before tax		1735000
Less: tax @ 24%		416400
After tax Income		1318600
Annual Operating cashflows			1318600
Multiply: Annuity PVF at15% for 4yrs			2.85498
Present value of inflows				3764577
tax shield on dep (2850000*24%)0.571753				391079.1
WC investment release (450000*0.571753)				257288.9
After tax salvage (400000*76%*0.571753)				173812.9
Total inflows				4586757
Less: Investment (2850000+450000)				-3300000
NPV				1286757
Answer is 1286757