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Wheel Industries is considering a three-year expansion project. The project requires an initial investment of $1.5 million. The project will use straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year and has annual costs of $600,000. The tax rate is 35 percent. Calculate the cash flows for the project. If the discount rate were 6 percent, calculate the NPV of the project, then offer your thoughts as to whether this is an economically acceptable project to undertake. Clinton Co. has jus
After tax cash flow per year = (1,200,000 - 600,000) * (1-0.35) = 390,000 Value of the project = (390,000) / 0.06 = $6,500,000 NPV = 6,500,000 - 1,500,000 = $5,000,000
The npv would be 390/1.06 + 390/1.06^2 + 390/1.06^3