Question
Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated
Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The tax rate is 21 percent and the required return is 12 percent. Suppose the project requires an initial investment in net working capital of $250,000 and the fixed asset will have a market value of $180,000 at the end of the project. What is the project's year 0, year 1, year 2, year 3 net cash flow? Year 1? What is the NPV?
Asset investment $2,180,000
Estimated annual sales $1,645,000
Costs $610,000
Tax rate 21%
Required return 12%
Project and asset live 3
Initial investment in NWC $250,000
Fixed asset value at end $180,000
My Solution:
Aftertax salvage value
Sell equipment $180,000
Taxes (37,800)
Aftertax salvage value $142,200
Connect says I have the annual depreciation amounts incorrect. I calculated $726,667 in Years 1-3. Connect also says I have Yr 1 cash flow incorrect. I calculated it to be $970,250. Could you please help me? Please see my solution below! I am stumped...unless Connect doesn't like the formula I used?
Year 0 Year 1 Year 2 Year 3
Sales $1,645,000 $1,645,000 $1,645,000
Costs $610,000 $610,000 $610,000
Depreciation 726,667 726,667 726,667
EBT $308,333 $308,333 $308,333
Taxes 64,750 64,750 64,750
Net income $243,583 $243,583 $243,583
Capital spending ($2,180,000) $142,200
Net working capital ($250,000) $250,000
OCF $970,250 $970,250 970,250
Total cash flow ($2,430,000) $970,250 $970,250 1,362,450
NPV $179,537
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