Quad Enterprises is considering a new three-year expansion project that requires
ID: 2777419 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 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 $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return on the project is 15 percent. What is the project's NPV? Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 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 $2,030,000 in annual sales, with costs of $725,000. The tax rate is 35 percent and the required return on the project is 15 percent. What is the project's NPV?Explanation / Answer
Calculation of NPV:
Year 0
Year 1
Year 2
Year 3
Initial fixed asset investment
$ (2,550,000.00)
Annual Sales (Net of Tax) = 2030000*(1-35%)
$ 1,319,500.00
$ 1,319,500.00
$ 1,319,500.00
Annual Costs (Net of Tax) = 725000*(1-35%)
$ (471,250.00)
$ (471,250.00)
$ (471,250.00)
Tax Saving on depreciation = (2550000 /3)*35%
$ 297,500.00
$ 297,500.00
$ 297,500.00
Net cash flows (CF)
$ (2,550,000.00)
$ 1,145,750.00
$ 1,145,750.00
$ 1,145,750.00
PVF (15%)
1.00000
0.86957
0.75614
0.65752
PV = CF*PVF
$ (2,550,000.00)
$ 996,304.35
$ 866,351.61
$ 753,349.22
NPV = Sum of PVs
$ 66,005.18
Calculation of NPV:
Year 0
Year 1
Year 2
Year 3
Initial fixed asset investment
$ (2,550,000.00)
Annual Sales (Net of Tax) = 2030000*(1-35%)
$ 1,319,500.00
$ 1,319,500.00
$ 1,319,500.00
Annual Costs (Net of Tax) = 725000*(1-35%)
$ (471,250.00)
$ (471,250.00)
$ (471,250.00)
Tax Saving on depreciation = (2550000 /3)*35%
$ 297,500.00
$ 297,500.00
$ 297,500.00
Net cash flows (CF)
$ (2,550,000.00)
$ 1,145,750.00
$ 1,145,750.00
$ 1,145,750.00
PVF (15%)
1.00000
0.86957
0.75614
0.65752
PV = CF*PVF
$ (2,550,000.00)
$ 996,304.35
$ 866,351.61
$ 753,349.22
NPV = Sum of PVs
$ 66,005.18