Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.52 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 $294584 at the end of the project. The project is estimated to generate $2146553 in annual sales, with costs of $809789. The project requires an initial investment in net working capital of $360133. If the tax rate is 30 percent and the required return on the project is 12 percent, what is the project's NPV?

Answer #1

NET PRESENT VALUE | |||||

Annual revenue | 2146553 | ||||

Lles: Annual cost | 809789 | ||||

Less: Annual depreciation | 840000 | ||||

(2520,000/3) | |||||

Net income before tax | 496764 | ||||

Lless: tax @ 30% | 149029 | ||||

Net income after tax | 347735 | ||||

Add: Depreciation | 840,000 | ||||

Annual cash inflows | 1,187,735 | ||||

Annuity factor at 12% for 3 yrs | 2.4018 | ||||

Present value of annual cashflows | 2852702 | ||||

Add: Present value of Salvage value | 209685 | ||||

($ 294584* PVF of Yr-3 i.e.0.7118) | |||||

Add: Present value of Working capital release | 256328 | ||||

($360133 * PVF of Yr-3 i.e. 0.7118) | |||||

Total Present value of inflows | 3,318,715 | ||||

Less: Initial Investment | -2,520,000 | ||||

Less: Initial Working capital required | -360,133 | ||||

Net Present value | 438,582 | ||||

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