Question

 A firm is deciding on a new project.
-initial costs $450,000 for fixed assets, will depreciate straight line to zero over 3 year project life
-fixed assets have estimated salvage value of $30,000 at the end of project
-project requires an additional $100,000 for net working capital to start the project 
-net working capital will be recouped at the end of 3 years
-annual sales of $1,000,000 (1,000 units at $1,000) and total costs of $550,000/year
-tax rate is 40%
-required rate of return for project is 20%

A.) What are the Cash Flows, change in NWC, NCS, and CFFA from Assets for Year 0? Year 1? Year 2? Year 3?

B.) What is the NPV?

Please show work

Answer 1

A)		0	1	2	3
	Annual sales		1000000	1000000	1000000
	Total costs		550000	550000	550000
	Depreciation (450000/3)		150000	150000	150000
	EBIT		300000	300000	300000
	Tax rate at 40%		120000	120000	120000
	NOPAT		180000	180000	180000
	Add: Depreciation		150000	150000	150000
	OCF		330000	330000	330000
	Change in NWC	100000			-100000
	Net capital spending	450000			-18000
	CFFA	-550000	330000	330000	448000
B)	PVIF at 20%	1	0.83333	0.69444	0.57870
	PV at 20%	-550000	275000	229167	259259
	NPV	213426
	As the NPV is positive, the project can be accepted.