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Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...

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Simmons, Inc., is considering a new 4-year project that requiresan initial fixed asset investment of $3.65 million. The fixed assetis eligible for 100 percent bonus depreciation in the first year.At the end of the project, the asset can be sold for $460,000. Theproject is expected to generate $3.25 million in annual sales, withannual expenses of $975,000. The project will require an initialinvestment of $510,000 in NWC that will be returned at the end ofthe project. The corporate tax rate is 21 and the project has arequired return of 15 percent. What is the NPV of the project? (Donot round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.)

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3.6 Ratings (332 Votes)

Answer: We will have to calculate the Cash flow and then Discount it to calculate the present value using the formula

Cash Flow/(1 + Discount rate)^ (no of years)

Discount rate =15%

tax rate =21%

Year 0 1 2 3 4
Initial Investment -3.65
Sales 3.25 3.25 3.25 3.25
Annual Expenses 0.975 0.975 0.975 0.975
Increase in NWC -0.51 0.51
Depreciation (100% in Year 1) 3.65 0 0 0
Salvage value 0 0 0 0.46
Taxable income(Sale- Expense- Dep. + Salvage value + NWC) -1.375 2.275 2.275 3.245
Tax(21% of taxable income) 0 0.47775 0.47775 0.68145
PAT(Taxable Income - tax) -4.16 -1.375 1.79725 1.79725 2.56355
Cash Flow(Add back Depreciation) -4.16 2.275 1.79725 1.79725 2.56355
Present value (Cash Flow/(1+0.15)^(no of year) -4.16 1.978261 1.358979 1.181721 1.465718
NPV (Sum of all Present values) 1.824679

As the NPV is Coming out to be Positive it is profitable to pursue this project.
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Transcribed Image Text

Simmons, Inc., is considering a new 4-year project that requiresan initial fixed asset investment of $3.65 million. The fixed assetis eligible for 100 percent bonus depreciation in the first year.At the end of the project, the asset can be sold for $460,000. Theproject is expected to generate $3.25 million in annual sales, withannual expenses of $975,000. The project will require an initialinvestment of $510,000 in NWC that will be returned at the end ofthe project. The corporate tax rate is 21 and the project has arequired return of 15 percent. What is the NPV of the project? (Donot round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.)

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