Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The tax rate is 21 percent and the required return is 12 percent. What is the project’s NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)


To determine the Net Present Value (NPV) of the expansion project, we will follow a structured approach to calculate the project's free cash flows, and then discount those cash flows to their present value. Here's the step-by-step process:

### Step 1: Calculate the Depreciation Expense
The fixed asset investment is $2.18 million and will be depreciated straight-line over 3 years. So, the annual depreciation is:

\[
\text{Depreciation} = \frac{\text{Initial Investment}}{\text{Number of Years}} = \frac{2,180,000}{3} = 726,666.67
\]

### Step 2: Calculate Annual Earnings Before Tax (EBT)
We know the annual sales are $1.645 million and the annual costs are $610,000. The Earnings Before Tax (EBT) is:

\[
\text{EBT} = \text{Sales} - \text{Costs} - \text{Depreciation}
\]
Substituting the known values:

\[
\text{EBT} = 1,645,000 - 610,000 - 726,666.67 =

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The tax rate is 21 percent and the required return is 12 percent. What is the project’s NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Discover how to calculate the Net Present Value (NPV) for a three-year expansion project with an initial investment of $2.18 million. This problem involves depreciation, cash flow analysis, and discounting using a required return of 12%. Suitable for undergraduate finance and business students.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation