Question

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?

Answer #1

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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