A firm is considering investing in a project that has a lifespan of 5 years.

The development phase will take one year to complete and it will cost the firm $900,000 at the beginning of the year (i.e., year 0) and another $1.3 million the end of year (i.e., year 1). The firm plans to capitalize these two expenses.

The project is expected to generate revenues starting with year 2. Specifically, the project is expected to generate revenues of $3.5 million in year 2, $4.5 million in year 3, $2.5 million in year 4 and $1.5 million in year 5.

The project's costs are expected to be $2.5 million in year 2, $2.5 million in year 3, $1.5 million in year 4, and $1 million in year 5.

The project is expected to need working capital expenses of $400,000 in year 1, $300,000 in year 2, $100,000 in year 3, -$200,000 in year 4, and -$600,000 in year 5. Note that the working capital expenses of the project for years 4 and 5 are negative.

The project is expected to generate a tax liability each year that is approximately 20% of the project's profit for that year.

Finally, the firm's discount rate for this type of project is 10% per year.

What is the NPV of the project?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project you need to calculate the present value of all cash flows including the initial investment annua... View the full answer