Question

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.

Answer #1

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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