Quad Enterprises is considering a new three-year expansion project that requires
ID: 2465381 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.47 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 $254871 at the end of the project. The project is estimated to generate $2086353 in annual sales, with costs of $893856. The project requires an initial investment in net working capital of $367488. If the tax rate is 31 percent and the required return on the project is 9 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)
Explanation / Answer
Year Initial fixed investment Initial WC investment Market value Annual Sales Cost Depriciation Net Income Tax @ 31% Net Income after tax Net Cash Flow 0 -2470000 -367488 -2837488 1 2086353 -893856 -738376.3333 454120.6667 -140777.4067 313343.26 1051719.593 2 2086353 -893856 -738376.3333 454120.6667 -140777.4067 313343.26 1051719.593 3 254871 2086353 -893856 -738376.3333 454120.6667 -140777.4067 313343.26 1306590.593 NPV = CF1/(1+i)1+CF2/(1+I)2 + cf3/(1+i03 - Initial Investment =1051720 /( 1+0.09)1+1051720/(1+0.09)2+1306591/(1+0.09)3 - 2837488 =1051720 /( 1.09)+1051720/1.1881+1306591/(1.2950 - 2837488 =964880.7+885211.7+1008951-2837488 = 21555