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 and has costs of $600,000.

The tax rate is 35%. Calculate the cash flows for the project. If the discount rate is 6% calculate the NPV of the project.

. Depreciation = Cost of the asset – salvage value

Life of the asset
= 1,500,000/ 3
= 500,000
Calculation of cash flows:
Revenue – 1,200,000
Less Cost – 600,000
Less Depreciation – 500,000
Profit - 100,000
Less taxes (35%) 35,000
Profit after taxes 65,000
Add depreciation 500,000
Cash flow after taxes 565,000

NPV = Present value of cash flows - Cash outlay
= 565,000 x PVIFA 6%, 3 years – 1,200,000
= 565,000 x 2.6730 – 1,200,000
= 1,510,245 – 1,200,000
= 310,245

This project should be accepted because the NPV is positive.

SORRY I MISCALCULATED SOMETHING!!! HERE IS THE CORRECT SOLUTION!

a. Cash flows (Millions of Dollars)
Year 0 Year 1 Year 2 Year 3
Initial Investment –1.5
Sales 1.2 1.2 1.2
Costs 0.6 0.6 0.6
–Depreciation 0.5 0.5 0.5
EBT 0.1 0.1 0.1
Taxes 0.035 0.035 0.035
NI 0.065 0.065 0.065
+ Depreciation 0.5 0.5 0.5
OCF 0.565 0.565 0.565

Total cash flows –1.5 0.565 0.565 0.565

NPV at 6% = –1,500,000 + 565,000/(1.06) + 565,000/(1.06)2 + 565,000/(1.06)3
= –1,500,000 + 533,018.869 + 502,847.988 + 474,384.894
= $10,251.751
NPV = +$10,251 Acceptable project
The PV could have been calculated by using the table in the back of the text.
b. r = D1/ P0 + g = [2.50(1.06)/50] + 0.06 = 11.3%

fOR THE npv CALCULATION,

-1,5000,000 + 565,000/(1.06)+ 565,000/(1.06)^2 + (1.06)^3
tHEY ARE SUPPOSED TO BE EXPONENTS. aLSO KEEP IN MIND THAT THE SET OF 3 NUMBERS YOU SEE IN PART a UNDER CASH FLOWS, REPRESENT THE AMOUNT IN YEAR 1, YEAR 2, AND YEAR 3, WHERE THERE IS A FOURTH NUMBER IN THE ROW THAT IS FOR YEAR 0. i'M SORRY FOR THE PRIOR CONFUSION AND THAT THIS PASTED WEIRD---I HOPE THIS HELPS.

To calculate the cash flows for the project, we need to consider the initial investment, additional revenues, costs, depreciation, and taxes.

1. Initial investment: The project requires an initial investment of $1.5 million. This amount is deducted from the cash flow.

2. Additional revenues: The project is estimated to generate additional revenues of $1.2 million. This amount is added to the cash flow.

3. Costs: The project has costs of $600,000. This amount is deducted from the cash flow.

4. Depreciation: The project uses the straight-line depreciation method, which means that the cost of the project is spread evenly over its useful life. Since the project has no salvage value, the total depreciation expense is equal to the initial investment divided by the useful life of the project. In this case, the useful life is three years. So, the depreciation expense is $1.5 million / 3 years = $500,000 per year. Depreciation expense does not affect cash flow but is considered for tax calculations.

5. Taxes: The tax rate is 35%. To calculate the tax liability, we need to consider the taxable income, which is the profit before taxes (revenues minus costs minus depreciation). In this case, the taxable income is ($1.2 million - $600,000 - $500,000) = $100,000. The tax liability is 35% of the taxable income, so the taxes are ($100,000 * 35%) = $35,000.

Now, we can calculate the cash flows for each year of the project:

Year 0: Cash flow = -Initial investment = -$1.5 million.

Year 1: Cash flow = Additional revenues - Costs - Taxes = $1.2 million - $600,000 - $35,000 = $565,000.

Year 2: Cash flow = Additional revenues - Costs - Taxes = $1.2 million - $600,000 - $35,000 = $565,000.

Year 3: Cash flow = Additional revenues - Costs - Taxes = $1.2 million - $600,000 - $35,000 = $565,000.

To calculate the Net Present Value (NPV) of the project, we need to discount the cash flows at the given discount rate of 6%. The NPV formula is:

NPV = Cash flow year 0 / (1 + r)^0 + Cash flow year 1 / (1 + r)^1 + Cash flow year 2 / (1 + r)^2 + Cash flow year 3 / (1 + r)^3

where r is the discount rate.

Using the calculated cash flows, the NPV can be calculated as follows:

NPV = (-$1.5 million) / (1 + 0.06)^0 + $565,000 / (1 + 0.06)^1 + $565,000 / (1 + 0.06)^2 + $565,000 / (1 + 0.06)^3

Simplifying the equation and calculating the values:

NPV = (-$1.5 million) + $532,547 + $502,804 + $473,947 = $9,298

Therefore, the NPV of the project is $9,298.