Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 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 $1,990,000 in annual sales, with costs of $685,000. The tax rate is 30 percent and the required return on the project is 18 percent.

What is the project’s NPV?

(Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Annual Depreciation=(Cost-Salvage value)/Useful Life

=(2,430,000/3)=$810,000/year

Hence annual operating cash flow=(Sales-Costs)(1-tax rate)+tax savings on Annual Depreciation

=(1,990,000-685000)(1-0.3)+(0.3*810,000)

=$1156500

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$1156500[1-(1.18)^-3]/0.18

=$1156500*2.17427293
=$2,514,546.64

NPV=Present value of inflows-Present value of outflows

=$2,514,546.64-$2,430,000

=$84,546.64(Approx).