Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3.11 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 $2064280 in annual sales, with costs of $828848. If the tax rate is 34 percent and the required return on the project is 10 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

Initial Investment = $3,110,000
Useful Life = 3 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $3,110,000 / 3
Annual Depreciation = $1,036,667

Annual OCF = (Sales - Cost)*(1 - tax) + tax*Annual Depreciation
Annual OCF = ($2,064,280 - $828,848)*(1-0.34) + 0.34*$1,036,667
Annual OCF = $1,167,851.90

NPV = -$3,110,000 + $1,167,851.90/1.10 + $1,167,851.90/1.10^2 + $1,167,851.90/1.10^3
NPV = -$205,725

So, NPV of the project is -$205,725