Question

HShapedB Inc. is considering an eight year project with an initial outlay of $220 million. The project's assets will be depreciated straight-line to zero and their expected salvage value is $35 million. The project is expected to generate sales of $22 million in the first year, $60 million is the second, and $110 million annually after that. The project is expected to require fixed operating costs of $17 million, and variable operating costs are estimated at about 25% of sales. The relevant marginal tax rate is 35% and the RRR for this project is 10.5%. Find NPV longhand to determine if HShapedB should invest.

Answer 1

Operating cashflows
			Year-1	Year-2	YEar3-8
Sales			22	60	110
Less: VC			5.5	15	27.5
Less: Fixed cst			17	17	17
Less: Depreciation			27.5	27.5	27.5
Before tax income			-28	0.5	38
Less: Tax @ 35%			9.8	-0.175	-13.3
After tax income			-18.2	0.325	24.7
Add: Depreciation			27.5	27.5	27.5
Annual cashflows			9.3	27.825	52.2
NPV
			Year-0	Year-1	Year-2	Year-3-7	Year-8
Initial investment			-220
Annual cashflows				9.3	27.825	52.2	52.2
After tax salvage (35-35%)							22.75
Net cashflows			-220	9.3	27.825	52.2	74.95
PVF at 10.50%			1	0.904977	0.818984	3.06534	0.449885
Present value of cashflows			-220	8.416286	22.78823	160.0107	33.71888
NPV			4.934million