Describe Capital budgeting decision based on net present value

Phone Home, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $4.2 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $3,100,000 in annual sales, with costs of $990,000. If the tax rate is 35 percent, what is the OCF for this project?

\Suppose that the required return on the project is 12 percent. What is the project's NPV?

Suppose the project requires and initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. What is the project's year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?

Suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project's year 1 net cash flow now? Year 2? Year 3? What is the new NPV?