# Net present value (NPV) of the proposed project

Company A is considering a major expansion of its business. The details of the proposed expansion project are summarized below:

? The company will have to purchase $500,000 in equipment at t = 0. This is the depreciable cost.

? The project has an economic life of four years.

? The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule:

MACRS

Depreciation

Year Rates

1 0.33

2 0.45

3 0.15

4 0.07

? At t = 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t = 4.

? The project's salvage value at the end of four years is expected to be $0.

? The company forecasts that the project will generate $800,000 in sales the first two years (t = 1 and 2) and $500,000 in sales during the last two years (t = 3 and 4).

? Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue.

? The company's tax rate is 40%.

? The project's cost of capital is 10%.

What is the net present value (NPV) of the proposed project?

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#### Solution Preview

Company A is considering a major expansion of its business. The details of the proposed expansion project are summarized below:

? The company will have to purchase $500,000 in equipment at t = 0. This is the depreciable cost.

? The project has an economic life of four years.

? The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule:

MACRS

Depreciation

Year Rates

1 0.33

2 0.45

3 0.15

4 0.07

? At t = 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t = 4.

? The project's salvage value at the end of four years is expected to be $0.

? The company forecasts that the project will generate $800,000 in sales the first two years (t ...

#### Solution Summary

This solution is comprised of a detailed explanation and calculation to compute net present value (NPV) of the proposed project in an Excel file.