Benkart Inc is considering a new threeyear expansion project

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).)

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.

Solution

Particulars Year 1 Year 2 Year 3 Total Sales              1,525,000              1,525,000            1,525,000 Less: COGS                  850,000                  850,000                850,000 Less: Depreciation                  490,000                  490,000                490,000 EBIT                  185,000                  185,000                185,000 Less: Tax at 35%                    64,750                    64,750                  64,750 EAT                  120,250                  120,250                120,250 Add: Depreciation                  490,000                  490,000                490,000 Cash Flow                  610,250                  610,250                610,250          1,830,750 PVF at 12%                    0.8929                    0.7972                  0.7118 Present Value            544,866.07            486,487.56          434,363.90    1,465,717.53 Less: Cost of Equipment      1,470,000.00 NPV          (4,282.47)