Question

Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of 2.32 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 estimated to generate 1.735 million in annual sales, with costs of 650,000. The tax rate is 21 percent and the required return on the project is 12 percent. What is the project's NPV?

Answer 1

Answer:

$128,787.07

Explanation:

Initial investment = $2.32 million = $2,320,000

Depreciation = investment ÷ Useful life

= $2,320,000 ÷ 3

= $773,333.33

Operating cash flows from year 1 to year 3

= [ ( Sales - Costs - Depreciation ) × (1 - tax) ] + Depreciation

= [ ( $1,735,000 - $650,000 - $773,333.33 ) × (1 - 0.21) ] + $773,333.33

= 1019549.99 ≈ 1,019,550

Thus,

NPV = Present value of cash inflows - Present value of cash outflows

Also,

Initial investment = $\frac{1,019,550}{(1 + 0.12)^1} + \frac{1,019,550}{(1 + 0.12)^2} + \frac{1,019,550}{(1 + 0.12)^3}$ - 2,320,000

or

NPV = $128,787.07