Phone Home, Inc. is considering a new 4-year expansion project that requires an
ID: 2627759 • Letter: P
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:
Annual Depreciation = Cost/Estimated Life = 3000000/4 = 750000
Initial Investment = -3000000 - 330000 = -3330000
Annual Cash Inflow = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation = (2640000 - 1056000 - 750000)*(1-.33) + 750000 = 1308780
Terminal Year Cash Flow = Annual Cash Inflow + 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 or $681409
Answer is $681408.95 or $681409.
Thanks.