Air Taxi, Inc. is considering a new 3-year expansion project that requires an in

Question

Air Taxi, Inc. is considering a new 3-year expansion project that requires an initial fixed asset investment of $1,500,000 million dollars. The asset will be depreciated over a 3 year tax life and have no salvage value. The project is estimated to have annual cash flows of $1,210,000 with a cost of $475,000. The tax rate is 35% percent and the required rate of return is 11% percent.

What is the project NPV?

Asset investment    $1,500,000 Estimated annual sales    $1,210,000 Costs    $ 475,000 Tax rate 35% *Depreciation straight-line
to zero over tax life 3   Required return 11%

Explanation / Answer

Annual cash inflow :

Net present value = Present value of cash inflow-Present value of cash outflow

= (652750*2.44371)-1500000

Net present value = 95134.78

So answer is a) $95134.78

Annual sales 1210000 Less: Costs -475000 Less: Depreciation (1500000/3) -500000 Income before tax 235000 Less: Tax @35% -82250 Net income 152750 Add: Depreciation 500000 Annual cash flow 652750

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