Question

# A project requires an initial investment of \$2,400,000 depreciated straight-line to \$0 in 10 years. The...

A project requires an initial investment of \$2,400,000 depreciated straight-line to \$0 in 10 years. The investment is expected to generate annual sales of \$700,000 with annual costs of \$450,000 for 20 years. Assume a tax rate of 30% and a discount rate of 10%. What is the NPV of the project?

Please solve using a financial calculator.

CF0 = \$2,400,000

The amount of depreciation = \$2,400,000/10

= \$240,000

The cash flows are:

(Sales - costs )* (1 - tax rate ) + tax rate * depreciation

= (\$7,00,000 - \$4,50,000) * 0.7 + 0.3* \$2,40,000
=\$1,75,000 + \$72,000

= \$2,47,000

For the next 10 years, the cash flows are as depreciation,tax shield will not be included,

CF11 - CF20

= \$175,000

So, the strokes in the financial calculator as as follows:

CF0 = (\$2,400,000)

CF1 TO CF10 = \$2,47,000

CF11 TO CF20 = \$1,75,000

I/Y = 10%

So, NPV =(\$467,717.5174)

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