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