Explore BrainMass

# Net Present Value and IRR: 20 Year Expansion Project

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

A 20 year expansion project has a depreciable capital outlay of \$50 million (straight line depreciation). It also has additional net working capital needs of \$5 million. The project is expected to generate revenues of \$30 million and expenses of \$23 million during each year of the project. There is a debug expense of \$3 million in the first year and a salvage value in year 20 is estimated to be \$5 million. The tax rate is 30%. The WACC is 11.333%. What is the NPV? Find the IRR of the project. Find the breakeven level of revenues.

https://brainmass.com/economics/break-even-analysis/net-present-value-and-irr-20-year-expansion-project-507697

#### Solution Preview

First, analyze the information given in the problem.

Number of years of the expansion project n = 20
Initial investment = \$50 (million) [all numbers in this problem are in \$millions] capital outlay + \$5 million increase in net working capital + \$3 million debug expense = 50 + 5 + 3 = \$58 (this is the negative cash flow at the beginning of the project)
Depreciation = straight line, meaning equal amounts of depreciation every year for 20 years = 50/20 = \$2.5 million depreciation annually. Note that the increase in net working capital (\$5 million) and the extra debug expense (\$3 million) are not depreciated.
Revenues = \$30 million for years 1-20
Expenses = \$23 million for years 1-20
Salvage value of the initial investment in year 20 = \$5 million
Tax rate = 30%
WACC (Weighted Average Cost of Capital) = 11.333%

Next, look at the questions.

Q1. What is the NPV ...

#### Solution Summary

This solution includes a step-by-step solution to how to calculate NPV (net present value), IRR (internal rate of return), and the breakeven point for a 20 year expansion project.

\$2.49