Quad Enterprises is considering a new three-year expansion project that requires
ID: 2617767 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project’s NPV?
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 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 $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return on the project is 9 percent. What is the project’s NPV?
Explanation / Answer
annual depreciation=3000000/3=1000000
annual cash flow
=(2180000-875000)*(1-30%)+30%*(1000000)
=1213500
What is the project’s NPV
=-3000000+1213500/(1+9%)^1+1213500/(1+9%)^2+1213500/(1+9%)^3
=71726.08
THE above should be answer....