Question

There is a 5-year project that is expected to generate $32 million of cash revenue per year for the first 3 years and then S10 million per year for the next 2 years. The upfront cost to start the project is $90 million, and then it will cost $5 million per year to maintain this project. At the end of the project, the used fixed and working capital, which will be fully depreciated to 0 on the book, can be sold at the market value of $2.5 million. Use the discount rate of 8% and tax rate of 25%. What is the NPV of this project? A. -34.5 m B. -24 m D. -12.1 m

Answer 1

Npv means net present value i.e, present value of cash inflow minus present value of cash out flows.

Calculation of present value of cash out flows

Normal cash outflows- initial cash outflows($90m)

Presentvalue of cashoutflows- 90m ×1

= 90

PVAF = present value annuity factor formula given below.

PVAF= [1-(1/(1+I)ⁿ]/i

Calculation present value of cash inflows-

Normal cash inflows-

Particulars	1-3 years	4-5years
Revenue per year	32	10
Cash per year	5	5
Profit before depreciation	27	5
Depreciation (90/5)	18	18
EBT	9	(13)
Tax@25%	(2.25)	3.25
EAT	6.75	(9.75)
Add- depreciation	18	18
Cash inflows	24.75	8.25

Present value of cash inflows-

= 24.75 ×PVAF(3years,8%) +8.25 ×PVF(4 years,8%) +(8.25+2.5)×PVF(5years,8%)

=24.75 × 2.5771 +8.25×0.735 +10.75 ×0.6805

=77.2

Npv= 77.2 -90 = (12.8m) = (12.1) approximately