Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 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 $1,785,000 in annual sales, with costs of $695,000. The tax rate is 25 percent and the required return on the project is 12 percent. What is the project’s NPV? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

Answer:

$115,849.581

Explanation:

For computing the net present value first we have to do following calculations

Annual depreciation expense is

= (Cost - Salvage value) ÷ Useful life

= ($2.31 million ÷ 3)

= $770,000

Now

Annual Operating cash flow = (Sales - Costs) × (1 - tax rate) + Tax savings on Annual depreciation

= ($1,785,000 - $695,000) × (1 - 0.25) + (0.25 × $770,000)

= $817,500 + $192,500

= $1,010,000

Now Present value of annuity is

= Annuity × [1 - (1 + interest rate)^ -time period] ÷ rate  

= $1,010,000 × {1 - (1.12)^-3] ÷ 0.12

= $1,010,000 × 2.401831268

= $2,425,849.581

So, Net present value  is

= Present value of inflows - Present value of outflows

= $2,425,849.581 - $2,310,000

= $115,849.581