Question

# Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of \$2.67 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life and is estimated to have a market value of \$297260 at the end of the project. The project is estimated to generate \$2043001 in annual sales, with costs of \$843186. The project requires an initial investment in net working capital of \$374861. If the tax rate is 35 percent and the required return on the project is 12 percent, what is the project's NPV?

Initial Investment = \$2,670,000
Useful Life = 3 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = \$2,670,000 / 3
Annual Depreciation = \$890,000

NWC Investment = \$374,861

Salvage Value = \$297,260
After-tax Salvage Value = \$297,260*(1-0.35)
After-tax Salvage Value = \$193,219

Annual OCF = (Annual Sales - Annual Costs)*(1-tax) + tax*Annual Depreciation
Annual OCF = (\$2,043,001 - \$843,186)*(1-0.35) + 0.35*\$890,000
Annual OCF = \$1,091,379.75

Cash Flows:

Year 0 = -\$2,670,000 - \$374,861
Year 0 = -\$3,044,861

Year 1 = \$1,091,379.75

Year 2 = \$1,091,379.75

Year 3 = \$1,091,379.75 + \$374,861 + \$193,219
Year 3 = \$1,659,459.75

NPV = -\$3,044,861 + \$1,091,379.75/1.12 + \$1,091,379.75/1.12^2 + \$1,659,459.75/1.12^3
NPV = -\$19,202.87

So, NPV of the project is -\$19,202.87

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