Need the NPV for a proposed business expansion project with the
following financial data.
- 50,000 for new equipment (depreciated over 3-year MACRS)
- no salvage value, and no additional income after 4 years. 
- 5,000 increase in net working capital.  (this will be recovered at
the end of four years)
- operating cost are 60% of annual sales.
- projected increases in sales  
   Year 1 - 30,000  Year 2 - 35,000 Year 3 - 45,000 Year 4 - 40,000
- 40% tax rate
- 10% WACC. 
- a rental property will be used for the expansion, this property is
an existing asset of the business, they currently lease it out for
$3,000/y (before tax) (being paid at the end of the year).  This
rental income will no longer be coming in if the proposed expansion is
undertaken.

An explanation of the steps used to solve would be appreciated.

---

Request for Question Clarification by wonko-ga on 15 Apr 2005 12:04 PDT

I will answer your question about the present value factor if you will
allow me to present it as the official answer to the question.

Is that OK?

Sincerely,

Wonko

---

Clarification of Question by shugt23-ga on 15 Apr 2005 12:14 PDT

I will allow nh786 the opportunity to respond.  If I do not hear back
by tomorrow morning I will get back with you.

Thanks

Year 0	Year 1	Year 2	Year 3	Year 4

Depre% (3 Yrs Macrs)		33.33	44.45	14.81	7.41
					
sales	             a	         30000	35000	45000	40000
Cost @ 60%           b	         -18000	-21000	-27000	-24000
depre		                -16665	-22225	-7405	-3705
Nprof		                -4665	-8225	10595	12295
Tax		    c            1866	3290	-4238	-4918
					
Net Cash inflow	a+b+c	        13866	17290	13762	11082
Less Lease (3000 *60%)		-1800	-1800	-1800	-1800
Net cash inflow	         	12066	15490	11962	9282
					
PV Factor 		        0.909 	 0.826 	 0.751 	 0.683 
PV of cash flow		       10,969 	 12,802  8,987 	 6,340 
			 		
Total PV of inflow	39,098				
Work Cap	        -5,000				
Equipment	       -50,000				
PV of W Cap recov	 3,415	(5,000 * 0.683 PV factor for Year 4)			
Total	               -12,487				
					
Hence the NPV of the project  = - 12,487

Can you explain why the PV Factor is changed from year to year?  I
thought that it would be 10% across the board?

Thanks

NPV is 10% per year compounded annually.
So in Year one PV is = 1/1.10 = 0.909
Year 2 = 1/1.10*1.10 =  0.82
etc etc

In other words if you have 0.82 today and invested @ 10% per year you
will get $1 at the end of year 2 = 0.82 * 1.1 * 1.1  = 1