Question

Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of 2.32 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 estimated to generate 1.735 million in annual sales, with costs of 650,000. The tax rate is 21 percent and the required return on the project is 12 percent. What is the project's NPV?

Answer 1

Depreciation = 2,320,000 / 3

Depreciation = 773,333.333

Initial investment = 2,320,000

Operating cash flows from year 1 to year 3 = (sales - costs - depreciation)(1 - tax) + depreciation

Operating cash flows from year 1 to year 3 = (1,735,000 - 650,000 - 773,333.333)(1 - 0.21) + 773,333.333

Operating cash flows from year 1 to year 3 = 1,019,550

NPV = Present value of cash inflows - present value of cash outflows

Initial investment = -2,320,000 + 1,019,550 / (1 + 0.12)¹ + 1,019,550 / (1 + 0.12)² + 1,019,550 / (1 + 0.12)³

NPV = $128,787.07