Quad Enterprises is considering a new three-year expansion project that requires
ID: 2716572 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.44 million. The fixed asset will be depreciated straight-line over its three-year tax life, and the fixed asset will have a market value of $297209 at the end of the project. The project is estimated to generate $2189292 in annual sales, with costs of $858778. The project requires an initial investment in net working capital of $385625. If the tax rate is 35 percent and the required return on the project is 9 percent, what is the project's NPV?
Explanation / Answer
Details Amount Amount Initial Purchase Cost -24,40,000.00 Initial investment in WC -3,85,625.00 (A) -28,25,625.00 Annual Sales 21,89,292.00 Annual Cost -8,58,778.00 Operating cash infow 13,30,514.00 less tax @ 35% 4,65,679.90 Operating cash infow After tax 8,64,834.10 PVAF @ 9% for 3 years 2.53 Present value of operating cash inflow (B) 21,89,149.94 Depreciation Tax Shield =2440000/3*.35 2,84,666.67 PVAF @ 9% for 3 years 2.53 Present value of operating cash inflow from Dep tax Shield (C) 7,20,575.21 Recovery of Investment Working capital 3,85,625.00 Salvage value net of Capital Gain Tax=297209*.65 1,93,185.85 Total 5,78,810.85 DF @ 9% at the end of 3rd year 0.77218348 Present Value of recovery (D) 4,46,948.18 NPV 5,31,048.34