Question

After examining the NPV analysis for a potential project that would increase the firm’s output by 5 percent, an analyst’s manager tells the analyst to increase the initial fixed capital outlay in the analysis by $450,000. The initial fixed capital outlay would be fully depreciated on a straight-line basis over a 12-year life, regardless of whether it is increased. If the firm’s average tax rate is 28 percent, its marginal tax rate is 35 percent, and the required rate of return is 10 percent, what is the effect of the adjustment on the project NPV? (Do not round discount factor. Round intermediate calculations and final answer to the nearest whole dollar, e.g. 5,275.) Project NPV will be Entry field with correct answer by $

Answer 1

Effect of the adjustment on the project NPV is given as equal to=-450000+(450000/12*28%)/0.10*(1-1/1.1^12)
=-378456.23586

Project NPV will decrease by $378456.23586