Question

# Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...

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?

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

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