Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3.09 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 $2,132,664 in annual sales, with costs of $805,848. If the tax rate is 34 percent and the required return on the project is 11 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

Annual depreciation=(Cost-Residual value)/Useful Life

=(3,090,000/3)=$1030000/year

OCF=(Sales-Costs)(1-tax rate)+Tax savings on annual depreciation

=(2,132,664-805,848)(1-0.34)+(0.34*1030000)

=1225898.56

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1225898.56/1.11+1225898.56/1.11^2+1225898.56/1.11^3

=2995746.35

NPV=Present value of inflows-Present value of outflows

=2995746.35-3,090,000

=-94254(Approx)(Negative).