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    Net Present Value and IRR: 20 Year Expansion Project

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    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.

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    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.