Phone Home, Inc. is considering a new 4-year expansion project that requires an

Question

Phone Home, Inc. is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will have a market value of $225,000. The project requires an initial investment in net working capital of $330,000, all of which will be recovered at the end of the project. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 33 percent and the required return for the project is 15 percent. What is the net present value for this project?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = - 3000000 - 330000 (initial working capital) = -3330000

Annual Cash Inflows = (Annual Sales - Cost - Depreciation)*(1-Tax Rate) + Depreciation = (2640000 - 1056000 - 3000000/4)*(1-.33) + 3000000/4 = 1308780

Terminal Year Cash Flow = Annual Cash Inflows + Recovery of Working Capital + Market Value*(1-Tax Rate) = 1308780 + 330000 + 225000*(1-.33) = 1789530

NPV = -3330000 + 1308780/(1+.15)^1 + 1308780/(1+.15)^2 + 1308780/(1+.15)^3 + 1789530/(1+.15)^4 = 681408.95

Answer is 681408.95.

Thanks.

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