Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,470,000 in annual sales, with costs of $1,490,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $197,000 at the end of the project. Assume that the tax rate is 24 percent and the required return on the project is 10 percent.

What are the net cash flows of the project each year?

Year 0= 	-2,512,000			Year 1= 	932,800			   Year 2= 	932,800				Year 3= 1,244,520

What is the NPV of the project?

To calculate the Net Present Value (NPV) of the project, we first need to determine the net cash flows for each year and then discount them back to the present value using the required return.

### Cash Flow Calculations

1. **Initial Investment (Year 0)**:
   - Fixed Asset Investment: $2,350,000
   - Initial Working Capital: $162,000
   - Total Cash Flow Year 0: $-2,350,000 - 162,000 = -2,512,000$

2. **Annual Cash Flows (Years 1-3)**:
   - **Sales**: $2,470,000
   - **Costs**: $1,490,000
   - **Depreciation**: $ \frac{2,350,000}{3} = 783,333.33 $
   - **Taxable Income**: $ \text{Sales} - \text{Costs} - \text{Depreciation} $
     - Yearly: $ 2,470,000 - 1,490,000 - 783,333.33 = 196,666.67 $
   - **Tax**: $ 196,666.67 \times 0.24 = 47,200.00 $
   - **Net Income**: $ 196,666.67 - 47,200.00 = 149,466.67 $
   - **Add Back Depreciation** (non-cash expense): $ 149,466.67 + 783,333.33 = 932,800.00 $

   The cash flow for Years 1 and 2 is $932,800.

3. **Year 3 Cash Flow**:
   - Add the salvage value of the asset ($197,000) to the cash flow:
   - Total Cash Flow Year 3: $ 932,800 + 197,000 = 1,129,800 $

### Summary of Cash Flows:
- Year 0: $-2,512,000$
- Year 1: $932,800$
- Year 2: $932,800$
- Year 3: $1,129,800$

### NPV Calculation
Using the formula for NPV:
\[
\text{NPV} = \sum_{t=0}^{n} \frac{CF_t}{(1 + r)^t}
\]
where $CF_t$ is the cash flow at time $t$ and $r$ is the discount rate (10% or 0.10).

\[
\text{NPV} = \frac{-2,512,000}{(1 + 0.10)^0} + \frac{932,800}{(1 + 0.10)^1} + \frac{932,800}{(1 + 0.10)^2} + \frac{1,129,800}{(1 + 0.10)^3}
\]

Calculating each term:
- Year 0: $-2,512,000$
- Year 1: $\frac{932,800}{1.1} = 848,909.09$
- Year 2: $\frac{932,800}{1.21} = 771,744.63$
- Year 3: $\frac{1,129,800}{1.331} = 849,244.58$

Now summing these values:
\[
\text{NPV} = -2,512,000 + 848,909.09 + 771,744.63 + 849,244.58
\]
\[
\text{NPV} = -2,512,000 + 2,469,898.30 = -42,101.70
\]

### Final NPV
The NPV of the project is approximately **$-42,101.70$**.

### Summary:
- Year 0 Cash Flow: $-2,512,000$
- Year 1 Cash Flow: $932,800$
- Year 2 Cash Flow: $932,800$
- Year 3 Cash Flow: $1,129,800$
- **NPV**: $-42,101.70$

Would you like more details on any part of the calculation, or do you have any questions? Here are some related questions to consider:

1. What factors could affect the cash flows of the project?
2. How does changing the discount rate impact the NPV?
3. What is the break-even point for this project?
4. What other investment criteria could be used to evaluate the project?
5. How would an increase in costs affect the NPV? 

**Tip**: Always consider sensitivity analysis when evaluating projects to see how changes in key assumptions impact the results.

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,470,000 in annual sales, with costs of $1,490,000. The project requires an initial investment in net working capital of $162,000, and the fixed asset will have a market value of $197,000 at the end of the project. Assume that the tax rate is 24 percent and the required return on the project is 10 percent. What are the net cash flows of the project each year? What is the NPV of the project?

Explore the detailed calculations of cash flows and NPV for Esfandairi Enterprises' three-year expansion project involving a $2,350,000 investment, generating $2,470,000 in annual sales and incurring costs of $1,490,000. Learn about the impact of depreciation and tax on cash flows.

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