Quad Enterprises is considering a new three-year expansion project that requires
ID: 2715910 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 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 $2,040,000 in annual sales, with costs of $735,000. The tax rate is 34 percent and the required return on the project is 15 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
Positive cash flows generated each year after investment = (Sales - Costs ) * (1-tax) = (2040000 - 735000 ) * (1-34%) = $861,300.00
Depreciation tax shield earned each year = Depreciation value per year * tax = (2580000 / 3)*34% = 292,400.00
All the cash flows are entered in an excel as follows
NPV of this investment is calculated as follows
=NPV(15%,D3:D5) - initial investment = 2634156.82 - 2580000 = $54,156.82
Here cells D3 to D5 have total cash flows from year 1 till year 3
Year Net Cash Flow Depreciation tax shield Total cash flow 0 (2,580,000.00) 0 (2,580,000.00) 1 861,300.00 292,400.00 1,153,700.00 2 861,300.00 292,400.00 1,153,700.00 3 861,300.00 292,400.00 1,153,700.00