Homework Answers
Depreciation = Initial fixed asset investment - Salvage / Useful life
= (2790000 - 225000) / 3 = 855000
Year 0 net cash flow = -(Initial fixed asset investment + Net working capital)
= - (2790000 + 330000)
= - 3120000
Year 1 and 2 net cash flow = (Annual Sale - Cost) * (1 - Tax) + Depreciation * Tax
= (2110000 - 805000) * (1 - 0.35) + 855000 * 0.35
= 1147500
Year 3 net cash flow = (Annual Sale - Cost) * (1 - Tax) + Depreciation * Tax + Salvage + Release of working capital
= (2110000 - 805000) * (1 - 0.35) + (855000 * 0.35) + 225000 + 330000
= 1147500 + 225000 + 330000
= 1702500
Calculation of NPV
| Year | Cash flow | DF @ 12% | Present value |
| 0 | -3120000 | 1 | -3120000 |
| 1 | 1147500 | 0.893 | 1024553.57 |
| 2 | 1147500 | 0.797 | 914779.97 |
| 3 | 1702500 | 0.712 | 1211805.87 |
| NPV | 31139.42 | ||
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