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).**

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