Quad Enterprises is considering a new three-year expansion project that requires
ID: 2715848 • 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? (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.)
Explanation / Answer
Particulars Year Cash Flows PVF @ 9% PV @ 9% Initial Investment 0 -3000000 1 -3000000 Cash Inflow net of tax ( 2180000-875000)*0.70 1 913500 0.92 8,38,073 Cash Inflow net of tax ( 2180000-875000)*0.70 2 913500 0.84 7,68,875 Cash Inflow net of tax ( 2180000-875000)*0.70 3 913500 0.77 7,05,390 Tax saving on depreciation ( 3000000/3*0.30) 1 300000 0.92 2,75,229 Tax saving on depreciation 2 300000 0.84 2,52,504 Tax saving on depreciation 3 300000 0.77 2,31,655 Net Present Value 71,726