Phone Home, Inc. is considering a new 4-year expansion project that requires an
ID: 2674835 • 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 $231,000. 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 31 percent and the required return for the project is 15 percent. What is the net present value for this project?
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Answer
Selected Answer:
$733,970
Explanation / Answer
Annual depreciation = $3 million/4 = 750000 Free cash flow Year 1 = Post tax Net income +depreciation -change in working capital = ($2,640,000 - $1,056,000 - 750000)*(1-.31) + 750000 - $330,000 = $995,460 Free cash flow Year 2 = ($2,640,000 - $1,056,000 - 750000)*(1-.31) + 750000 -0 =1325460 Free cash flow Year 3 = ($2,640,000 - $1,056,000 - 750000)*(1-.31) + 750000 -0 =1325460 Free cash flow Year 4 = ($2,640,000 - $1,056,000 - 750000)*(1-.31) + 750000 + salvage value + recovery of net working capital =1325460 + $231,000+ $330,000 = $1,886,460 NPV = -3,000,000 + $995,460/1.15 + 1325460/1.15^2 + 1325460/1.15^3 + $1,886,460/1.15^4 =$733,970