Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 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 $1,810,000 in annual sales, with costs of $720,000. The tax rate is 25 percent and the required return on the project is 13 percent. What is the project’s NPV?

Answer 1

Depreciation expense per year = $ 2,290,000 3

Depreciation expense per year = $ 763,333

The cash flows associated with the project is shown in the follwong table

The operating cash flow from year 1 to year 3 = ( Sales - costs - depreciation expense ) ( 1 - tax rate) + depreciation

Operating cash flow from year 1 to year 3 = ( $ 1,810,000 - $ 720,000 - $ 763,333 ) ( 1 - 0.25) + $ 763,333

Operating cash flow from year 1 to year 3 = $ 1,008,333.25

NPV of the project = $ 90,828.67