Question

Esfandairi enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,300,000. 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 $2,650,000 in annual sales, with costs of $1,670,000. assume the tax rate is 22 percent and the required return on the project is 12 percent. what is the project’s npv?

Answer 1

To calculate the NPV of the project, we need to discount the cash flows generated by the project to their present value. The formula for NPV is NPV = -(Initial Investment) + PV(Sales Revenues) - PV(Costs). We need to calculate the present value of the annual sales revenues and costs, and then subtract the initial investment.

Step-by-step explanation:

To calculate the NPV (Net Present Value) of the project, we need to discount the cash flows generated by the project to their present value. The formula for NPV is:

NPV = -(Initial Investment) + PV(Sales Revenues) - PV(Costs)

Using this formula, we need to calculate the present value of the annual sales revenues and costs, and then subtract the initial investment.

Here's the step-by-step calculation:

1. Calculate the annual cash flows: Sales Revenues - Costs
2. Calculate the present value of each cash flow using the formula PV = CF / (1+r)^n, where CF is the cash flow, r is the discount rate, and n is the number of years
3. Sum up the present values of all cash flows
4. Finally, subtract the initial investment from the sum to get the NPV

Plugging in the numbers:

1. Annual Cash Flows = $2,650,000 - $1,670,000 = $980,000
2. Present Value of Cash Flows = $980,000 / (1+0.12)^1 + $980,000 / (1+0.12)^2 + $980,000 / (1+0.12)^3
3. Sum of Present Values = Sum of individual present values
4. NPV = -(Initial Investment) + Sum of Present Values