Quad Enterprises is considering a new three-year expansion project that requires
ID: 2715849 • 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.)
Explanation / Answer
NPV = Present Value of Cash inflow – Present value of Cash outflow.
Present value of Cash inflow:-
Sales
(-) Costs
1990000
685000
Profit before depreciation
(-) Depreciation [2430000 / 3]
1305000
810000
Profit before Tax
(-) Tax @ 30%
495000
148500
Profit after Tax
(+) Depreciation
346500
810000
Annual Cash inflow for each of three years (A)
1156500
Cumulative Present value factors for 3 years
@ 18% (B)
2.1743 (approx)
Present value of Cash inflow (A) * (B)
2514577.95
Present value of Cash outflow = 2.43 million = 2430000 (2.52 * 1000000)
NPV = 2514577.95 – 2430000 =84577.95
Conclusion:- Net Present value (NPV) of project = $ 84577.95 (approx)
Sales
(-) Costs
1990000
685000
Profit before depreciation
(-) Depreciation [2430000 / 3]
1305000
810000
Profit before Tax
(-) Tax @ 30%
495000
148500
Profit after Tax
(+) Depreciation
346500
810000
Annual Cash inflow for each of three years (A)
1156500
Cumulative Present value factors for 3 years
@ 18% (B)
2.1743 (approx)
Present value of Cash inflow (A) * (B)
2514577.95