Question

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,400,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $3,010,000 in annual sales, with costs of $2,030,000. Assume the tax rate is 23 percent and the required return on the project is 10 percent. What is the project’s NPV?

Answer 1

To calculate the project's NPV, calculate the present value of cash flows and subtract the initial investment.The project’s NPV is $22,577.90

Step-by-step explanation:

To calculate the project's NPV, we need to calculate the present value of its cash flows and subtract the initial investment.

The annual cash flow is calculated by subtracting the costs ($2,030,000) from the sales ($3,010,000), which is $3,010,000 - $2,030,000 = $980,000.

Using the formula for calculating the present value of cash flows, we can calculate the present value of the annual cash flows over the three-year period as follows:

Year 1: $980,000 / (1 + 0.10) = $890,909.09

Year 2: $980,000 / (1 + 0.10)^2 = $801,826.45

Year 3: $980,000 / (1 + 0.10)^3 = $729,842.36

The sum of the present values of the cash flows is $890,909.09 + $801,826.45 + $729,842.36 = $2,422,577.90

Finally, we subtract the initial investment of $2,400,000 from the present value of the cash flows to get the NPV:

NPV = $2,422,577.90 - $2,400,000 = $22,577.90