Question

Please solve, show work, and give detail explanation

4. A firm is considering a new three-year expansion project that requires an initial asset investment of $2.7 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. The project requires an initial investment in net working capital of $300,000 and the fixed asset will have a market value of $210,000 at the end of the project. If the tax rate is 35 percent and the required rate of return is 12 percent, what is the project's NPV? Year000. 1 2 MACRS 33.33% 44.45% 3 14.81% 43.000 arch and d oronto 7.41% ost $22.000.000 and will be decided increase in networking capital of 3,000 bar e at the more proce Ther e is 40 percent and the cost of certis purent. What is the IRRY

Answer 1

Solution

= File S Home % Cut Insert Page Layout Formulas Data Review View Tell De Copy Calibri 11 BI U - - Font - A - A E === SE Wrap Text 3 Merge & Paste Format Painter Clipboard Alignment J6 в -2700000 А 1 Year 2 Initial asset 3 4 Annual sales 5 Cost 6 Depreciation 7 PBT(profit before tax) 8 Tax(35%) 9 PAT 10 Add: Depreciation 11 Total cash inflow 12 2080000.00 -775000.00 -899910.00 405090.00 141781.50 263308.50 899910.00 1163218.50 2080000.00 -775000.00 -1200150.00 104850.00 36697.50 68152.50 1200150.00 1268302.50 2080000.00 -775000.00 -399870.00 905130.00 316795.50 588334.50 399870.00 988204.50 -300000 300000 210000 14 Working capital 15 Fixed asset 16 17 PV factor(12%) 18 19 Total cashflow 0.892 0.797 0.711 -3000000.00 1037590.90 1 010837.09 1065223.40 20 21 NPV 113651.39 22

Steps

1) We just have to put all the inflows and outflows in the time they occurred and then we will get our NPV.

2) Initial investment is $27 million and working capital is $300000. These are cash outflows in the beginning of the year. Important thing is working capital investment will be return to hand after the project completion. So in third year we have showed is as cash inflow.

3) Then we come to annual cash inflow calculation. Where we will deduct cost and depreciation from sales to get profit before tax (PBT). After that we will deduct tax and we will get Profit after tax(PAT). Important thing is Depreciation. We know depreciation is a non-cash expense. So We will add it to get the actual net cash inflow to the company.

4) in the third year we will take the fixed asset salvage value as cash inflow.

5) calculate PV factor @12% as this is our expected return to discount all the cashflows.

6) Finally add all cash inflows after discounting and then deduct cash outflows from it. We will get our NPV.