4 Benkart Inc is considering a new threeyear expansion proje

4. Benkart, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,470,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,525,000 in annual sales, with costs of $850,000. Assume the tax rate is 35 percent and the required return on the project is 12 percent.

What is the project’s NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

Solution

NPV = - $4,282.47

Year

Cash outflows

Cash inflows

Depreciation = D = 1470000/3 = 490,000

Net cash flow* = (Co+Ci-D)x(1-Tax rate)+D

Discount factor = Df = 1/(1+12%)^Year

Present Values

Co

Ci

D

(Co+Ci-D)x(1-35%)+D

Df x Net Cash flows

0

-1,470,000.00

0.00

0.00

-1,470,000.00

1.000000

-1,470,000.00

1

-850,000.00

1,525,000.00

490,000.00

610,250.00

0.892857

544,866.07

2

-850,000.00

1,525,000.00

490,000.00

610,250.00

0.797194

486,487.56

3

-850,000.00

1,525,000.00

490,000.00

610,250.00

0.711780

434,363.90

Total = NPV =

-4,282.47

*         Do not apply the Net cash flow formula in “Year 0”