Present value of invesment: 55 million 10 year life of project expected sales: 2

Question

                                Present value of invesment: 55 million                             

                                10 year life of project                             

                                expected sales: 25 million                             

                                increase in operating expenses: 13 million                             

                                Depreciated over 10 years using the straight-line method                             

                                                             What is the NPV of this investment if it requires a return of 16%?

Explanation / Answer

Hi,

Please find the answer as follows:

Hi,

Please find the answer as follows:

Incremental After Tax Cash Flows = 25 - 13 - 55/10 = 6.5*(1-.18) + 55/10 = 10.83 million

NPV = -55 + 10.83/(1+.16)^1 + 10.83/(1+.16)^2+ 10.83/(1+.16)^3+ 10.83/(1+.16)^4+ 10.83/(1+.16)^5+ 10.83/(1+.16)^6+ 10.83/(1+.16)^7+ 10.83/(1+.16)^8 + 10.83/(1+.16)^9+10.83/(1+.16)^10 = -2.656 or -2.66 million

Thanks.

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