Quad Enterprises is considering a new three-year expansion project that requires
ID: 2453981 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.56 million. The fixed asset will be depreciated straight-line over its three-year tax life, and the fixed asset will have a market value of $224568 at the end of the project. The project is estimated to generate $2163352 in annual sales, with costs of $830575. The project requires an initial investment in net working capital of $385937. If the tax rate is 31 percent and the required return on the project is 9 percent, what is the project's NPV?
Explanation / Answer
Answer: Calculation of the Project's NPV:
Working notes:
Years 0 1 2 3 Investment cost -2560000 Investment in net working capital -385937 385937 Salvage value after tax (224568*0.69) 154951.9 OCF (See working notes) 1160944.1 1160944 1160944 Net cash flow -2945937 1160944.1 1160944 1701833 P.V.F (9%) 1 0.917431 0.84168 0.772183 PV($) -2945937 1065086.107 977143.3 1314127 NPV 410418.9475