Question

Consider a two-year project with annual estimated revenues of $500,000 and annual estimated operating costs of $250,000. These cash flows begin at the end of the first year. The project requires an initial capital expenditure of $200,000 which you can depreciate in a straight line over two years and has zero salvage value. The project requires a $150,000 working capital investment incurred immediately and recovered after the two years. The project requires use of land that you could sell today for a post-tax profit of $300,000, but you think you will be able to sell it for the same mount when the project is complete. What is the NPV of the project? Assume a 20% tax rate and a 12% opportunity cost of capital.

Answer 1

Calculation of NPV of project
Year	0	1	2	NPV
Initial Capital expenditure	-$200,000.00
Investment in working capital	-$150,000.00
Recovery of working capital			$150,000.00
Land opportunity cost	-$300,000.00
Sale of land			$300,000.00
Operating cash flow		$220,000.00	$220,000.00
Net Cash flow	-$650,000.00	$220,000.00	$670,000.00
x Discount factor @ 12%	1	0.89285714	0.79719388
Present Values	-$650,000.00	$196,428.57	$534,119.90	$80,548.47
NPV of the project =	$80,548.47
Calculation of yearly operating cash flow
Revenue	$500,000.00
Less : Operating cost	$250,000.00
Less : Depreciation	$100,000.00
Profit before Tax	$150,000.00
Less : Tax @ 20%	$30,000.00
Add : Depreciation	$100,000.00
Yearly Operating Cash Flow	$220,000.00