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.

To calculate the net present value (NPV) of the three-year expansion project, we'll need to consider the initial investment, the annual cash flows, and the discount rate. Let's break down the steps:

Step 1: Calculate the annual cash flows.
The annual cash flows are the additional revenues minus the annual costs. In this case, the additional revenues are $1.2 million per year, and the annual costs are $600,000. Therefore, the annual cash flows can be calculated as follows:
Annual cash flows = additional revenues - annual costs
Annual cash flows = $1,200,000 - $600,000
Annual cash flows = $600,000

Step 2: Calculate the total cash flows over the project's lifetime.
Since the project is for three years, we need to calculate the total cash flows over these three years. The total cash flows can be calculated by multiplying the annual cash flows by the number of years:
Total cash flows = annual cash flows × number of years
Total cash flows = $600,000 × 3
Total cash flows = $1,800,000

Step 3: Determine the discount rate.
The discount rate represents the rate of return expected from the investment. It considers factors such as the time value of money and the project's risk. Assuming a discount rate, you can plug in that value to the formula in the next step.

Step 4: Calculate the net present value (NPV).
The NPV is calculated by discounting the total cash flows back to their present value and subtracting the initial investment. The formula for NPV is as follows:
NPV = (Cash Flow Year 1 / (1 + Discount Rate)^1) + (Cash Flow Year 2 / (1 + Discount Rate)^2) + ... + (Cash Flow Year n / (1 + Discount Rate)^n) - Initial Investment
where n is the number of years.

Let's assume a discount rate of 10% and calculate the NPV of the project:
NPV = ($600,000 / (1 + 0.10)^1) + ($600,000 / (1 + 0.10)^2) + ($600,000 / (1 + 0.10)^3) - $1,500,000

By calculating the cash flows for each year (year 1, 2, and 3), discounting them back to the present value using the discount rate, and subtracting the initial investment, you can find the NPV of the project.

To analyze the project, we need to calculate the annual cash flows and determine the net present value (NPV) of the project. Let's break it down step-by-step:

Step 1: Calculate the annual cash flows.
Annual revenues: $1.2 million
Annual costs: $600,000
Depreciation expense: Since we are using the straight-line method with no salvage value, the depreciation expense will be calculated as follows:

Depreciation expense = (Initial investment - Salvage value) / Useful life
Since there is no salvage value and the project has a useful life of 3 years:
Depreciation expense = $1.5 million / 3 years = $500,000 per year

To calculate the annual cash flows, subtract the costs and depreciation expense from the revenues:
Annual cash flows = Revenues - Costs - Depreciation expense

Year 1: $1.2 million - $600,000 - $500,000 = $100,000
Year 2: $1.2 million - $600,000 - $500,000 = $100,000
Year 3: $1.2 million - $600,000 - $500,000 = $100,000

So, the annual cash flows for the 3-year project are $100,000 each year.

Step 2: Calculate the net present value (NPV) of the project.
To calculate NPV, we need to determine the discount rate or cost of capital. For this example, let's assume it is 10%.

NPV formula: NPV = Σ(CFt / (1+r)^t) - Initial investment
Where CFt = Cash flow in year t
r = Discount rate
t = Year

NPV = ($100,000 / (1+0.10)^1) + ($100,000 / (1+0.10)^2) + ($100,000 / (1+0.10)^3) - $1.5 million

Calculating each component:
NPV = ($90,909.09) + ($82,644.63) + ($75,131.48) - $1.5 million
NPV = $248,685.20 - $1.5 million
NPV = -$1,251,314.80

The net present value (NPV) of the project is -$1,251,314.80.

Step 3: Interpretation of NPV
A positive NPV indicates that the project is expected to generate more cash flows than the initial investment, indicating it may be a profitable investment. However, in this case, the NPV is negative, indicating that the project may not be financially attractive, and it is not expected to generate enough cash flows to cover the initial investment.

Please note that this analysis does not consider factors such as inflation, taxes, or other financial metrics that may be relevant in a comprehensive investment evaluation. It is always recommended to perform a thorough evaluation before making any investment decisions.