Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 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 $1,810,000 in annual sales, with costs of $720,000. The tax rate is 25 percent and the required return on the project is 13 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

	Computation of NPV
	Year	0	1	2	3	4
A	Initial investment	-2290000
	Operating cash flow
	sales		1,810,000	1,810,000	1,810,000	1,810,000
	Cost		720,000	720,000	720,000	720,000
	Depreciation		572500	572500	572500	572500
	Profit before tax		517,500	517,500	517,500	517,500
	Tax on profit @ 25%		129375	129375	129375	129375
	Net income		388,125	388,125	388,125	388,125
B	Operating cash flow		960,625	960,625	960,625	960,625
C=A+B	Net cash flow	-2290000	960625	960625	960625	960625
D	PVIF @ 13%	1	0.884955752	0.783146683	0.693050162	0.613318728
E=C*D	Present value	$ (2,290,000.00)	$         850,110.62	$ 752,310.28	$    665,761.31	$    589,169.30	$ 567,351.52
	NPV =	$       567,351.52