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Homework answers / question archive / A firm is considering a new seven-year expansion project with an initial fixed asset investment of $3
A firm is considering a new seven-year expansion project with an initial fixed asset investment of $3.8 million. The fixed asset will be depreciated straight-line to zero over its seven-year tax life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $2,457,000 in annual sales, with costs of $655,000. The tax rate is 24 percent and the required return is 7.8 percent. What is the net present value of this project?
Annual depreciation = 3,800,000 / 7 = 542,857.1429
Operating cash flow = (Sales - costs - depreciation)(1 - tax) + depreciation
Operating cash flow = (2,457,000 - 655,000 - 542,857.1429)(1 - 0.24) + 542,857.1429
Operating cash flow = 956,948.5714 + 542,857.1429
Operating cash flow = $1,499,805.714
net present value = Present value of cash inflows - present value of cash outflows
net present value = Annuity * [1 - 1 / (1 + rate)^periods] / rate - Initial investment
net present value = 1,499,805.714 * [1 - 1 / (1 + 0.078)^7] / 0.078 - 3,800,000
net present value = 1,499,805.714 * [1 - 0.59111] / 0.078 - 3,800,000
net present value = 1,499,805.714 * 5.24217 - 3,800,000
net present value = $4,062,241.13
