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 find the project's Net Present Value (NPV), we'll go through these steps:

1. **Calculate the Annual Depreciation:**
   - Initial investment: $2,180,000
   - Straight-line depreciation over 3 years: 
   
   \[
   \text{Annual Depreciation} = \frac{\text{Initial Investment}}{\text{Life of the Asset}} = \frac{2,180,000}{3} = 726,666.67
   \]

2. **Calculate the Annual Operating Cash Flows:**
   - Annual sales = $1,645,000
   - Annual costs = $610,000
   - Depreciation = $726,666.67
   - Tax rate = 21%

   **Step 1: Find the annual operating profit (EBIT):**
   
   \[
   \text{EBIT} = \text{Sales} - \text{Costs} - \text{Depreciation} = 1,645,000 - 610,000 - 726,666.67 = 308,333.33
   \]

   **Step 2: Calculate taxes on EBIT:**
   
   \[
   \text{Taxes} = \text{EBIT} \times \text{Tax rate} = 308,333.33 \times 0.21 = 64,750
   \]

   **Step 3: Calculate the Net Operating Profit After Taxes (NOPAT):**
   
   \[
   \text{NOPAT} = \text{EBIT} - \text{Taxes} = 308,333.33 - 64,750 = 243,583.33
   \]

   **Step 4: Add back the depreciation (non-cash expense):**
   
   \[
   \text{Operating Cash Flow} = \text{NOPAT} + \text{Depreciation} = 243,583.33 + 726,666.67 = 970,250
   \]

3. **Calculate the NPV of the Project:**
   - Initial investment = $2,180,000 (at year 0)
   - Annual cash flows = $970,250 (for years 1 to 3)
   - Required return (discount rate) = 12%

   The formula for NPV is:

   \[
   \text{NPV} = -\text{Initial Investment} + \sum_{t=1}^{n} \frac{\text{Cash Flow}_t}{(1 + r)^t}
   \]

   Let's break down the NPV calculation:
   
   \[
   \text{NPV} = -2,180,000 + \frac{970,250}{(1 + 0.12)^1} + \frac{970,250}{(1 + 0.12)^2} + \frac{970,250}{(1 + 0.12)^3}
   \]

4. **Compute the NPV:**  
   I'll now perform these calculations to find the NPV.The project's NPV is $150,376.79.

Would you like a detailed explanation of the calculation, or do you have any questions?

Here are 5 related questions that might expand your understanding:
1. How would the NPV change if the project's lifespan increased to 5 years?
2. What would happen to the NPV if the sales or costs changed annually?
3. How does changing the tax rate affect the project's cash flows and NPV?
4. What is the impact of using different depreciation methods on the NPV?
5. How would an increase in the required return (discount rate) affect the project's NPV?

**Tip:** NPV is a useful metric for assessing the profitability of a project, but always consider other financial indicators like the Internal Rate of Return (IRR) for a more comprehensive analysis.

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.)

Learn how to calculate the Net Present Value (NPV) for Esfandairi Enterprises' three-year expansion project. This includes key finance concepts such as annual depreciation, EBIT, taxes, operating cash flows, and the NPV formula. Detailed step-by-step calculations provided.

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