Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 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 $1,765,000 in annual sales, with costs of $675,000. The tax rate is 21 percent and the required return on the project is 12 percent. What is the project’s NPV? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

• NPV = sum of positive inflows - Amount invested.
• = $ 247996 i.e. $ 0.24 million.
• discount rate is calculated as: 1/(1+r)^n here r= required rate and n is time period (specific year).
• Income is taken as the Annual sales generated - cost given ($ 675,000). The given cost is assumed to be annual cost and is considered that it will remain constant over the life of the project.
• Annual sales is also assumed to remain constant over the life of the project.

*NOTE: Kindly comment in case of any confusion or not satisfied with the answer, will definitely clarify.