Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.97 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 $2,209,946 in annual sales, with costs of $856,923. If the tax rate is 37 percent and the required return on the project is 10 percent, what is the project's NPV?

Answer 1

Depreciation according to straight line method

= (Cost of Asset - Salvage Value )/ Tenure of the asset

Cost of the asset = 2,970,000 $

Salvage Value = 0

Tenure of the asset = 3 years

= (2970000 - 0)/3

= 990,000$

Present Value Factor = 1/(1+r)^n

r = 10%

n = Number of years.

Particulars	Year 0	Year 1	Year 2	Year 3
Cost of Machine	-2970000
Revenue		2209946	2209946	2209946
Less: Cost		-856923	-856923	-856923
Earning Before Depreciation, Interest and Tax		1353023	1353023	1353023
Less: Depreciation		-990000	-990000	-990000
Earnings Before Tax		363023	363023	363023
Less: Tax @ 37%		-134318.51	-134318.51	-134319
Profit After Tax (PAT)		228704.49	228704.49	228704.5
Add: Depreciation		990000	990000	990000
Cash Flow After Tax (A)		1218704.49	1218704.49	1218704
Present Value Factor @ 10% (B)	1	0.90909091	0.826446281	0.751315
Present Value (A*B)	-2970000	1107913.17	1007193.793	915630.7
Net Present Value (Sum of Present Values)	60737.69