Quad Enterprises is considering a new three-year expansion project that requires
ID: 2712185 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 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 $1,990,000 in annual sales, with costs of $685,000. The tax rate is 30 percent and the required return on the project is 18 percent. What is the project’s 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
Computation of the net present value is as follows:
Year
Cash flow
Discount rate@18%
Discounted cash flow
0
-2,430,000
1.00
-24,30,000.00
1-3
1,156,500
2.17
25,14,462.30
84,462.30
Thus, the net present value of the project is $84,462.
Working note on cash flows for the period:
Particulars
Amount
Amount
Annual sales
1,990,000
Less:
Costs
685,000
Depreciation
2430000/3
810,000
Net profit
495,000
Less:
Tax @30%
148,500
Net income
346,500
Add:
Depreciation
810,000
Cash flows for the period
1,156,500
Year
Cash flow
Discount rate@18%
Discounted cash flow
0
-2,430,000
1.00
-24,30,000.00
1-3
1,156,500
2.17
25,14,462.30
84,462.30