Question

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,410,000. 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 $2,710,000 in annual sales, with costs of $1,730,000. Assume the tax rate is 23 percent and the required return on the project is 9 percent. What is the project's NPV? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

The NPV of Esfandairi Enterprises' expansion project is calculated by discounting its expected annual operating cash flows at the required return rate of 9% and then subtracting the initial fixed asset investment.

Step-by-step explanation:

The project's Net Present Value (NPV) is calculated by summing the present value of the project's expected cash flows over its life span, and then subtracting the initial investment. First, we calculate the annual operating cash flows by taking annual sales ($2,710,000) minus costs ($1,730,000) and then subtracting taxes. Taxes are computed by taking the difference between sales and costs, and the depreciation ($2,410,000/3), then multiplying by the tax rate (23%). The remaining amount after taxes is added to the depreciation to get the annual operating cash flow.

Next, we discount these cash flows back to present value using the 9% required return rate. Finally, we subtract the initial investment to find the NPV. Remember, the fixed asset will be worthless at the end of the three years, so there is no salvage value to consider in our calculations.