Question

A retailer is looking to expand operations at all of their stores for an initial investment of $880. This investment will be depreciated on a straight line basis over the project's 10 year life. The expansion is expected to produce annual cash inflows of $540 in each year over the life of the project, while also producing annual cash outflows of $310 in each year over the life of the project. What is the project's NPV if the corporate tax rate is 32% and the project's required rate of return is 8%?

Answer 1

Answer: Calculation of NPV of the project: Formula will will use here NPV = Present value of Cash inflows - Initial cost Initial investment = 880.00 3 4 5 Total Year Cash inflows Less: Cash outflows less: Depreciation Profit before tax Less: Tax @32% Proft after tax Add: Depreciation (non-cash exp) Ne operating cash flow PVF @ 8% Present value 1 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.9259 170.89 2 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.8573 158.23 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.7938 146.51 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.7350 135.66 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.6806 125.61 6 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.6302 116.30 7 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.5835 107.69 8 540.00 310.00 88.00 142.00 45.44 96.56 88.00 184.56 0.5403 99.71 9 540.00 310.00 88.00 142.00 45.44 96.56 88.00 10 540.00 310.00 88.00 142.00 45.44 96.56 184.56 0.5002 92.33 88.00 184.56 0.4632 85.49 1238.41 NPV of Project Present value of cash inflows Less: Initial investment NPV of the Project 1,238.41 880.00 358.41 So, the NPV of the project is $358.41 (Answer) Note: Depreciation = (Cost)/ Total useful life