Quad Enterprises is considering a new three-year expansion project that requires

Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 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 $2,140,000 in annual sales, with costs of $835,000. The tax rate is 35 percent and the required return on the project is 10 percent. What is the projects NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

Annual depreciation=(Cost-Salvage value)/USeful life

=(2.88million-0)/3=$960,000/year

Hence annual cash flows=(Sales-Costs)(1-tax rate)+Tax savings on Depreciation

=(2140000-835000)(1-0.35)+(0.35*960000)

=$1184250

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$1184250[1-(1.1)^-3]/0.1

=$1184250*2.486851991

=$2945054.47

NPV=Present value of inflows-Present value of outflows

=$2945054.47-$2880000

=$65054.47(Approx).

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---