Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.186 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $247,800. The project requires an initial investment in net working capital of $354,000. The project is estimated to generate $2,832,000 in annual sales, with costs of $1,132,800. The tax rate is 22 percent and the required return on the project is 17 percent.

What is the NPV?

Answer 1

Calculation of Cash flows
	Year 0	Year 1	Year 2	Year 3
Initial Investment	(3,186,000)
Investment in Working capital	(354,000)
Annual sales		2,832,000	2,832,000	2,832,000
Costs		1,132,800	1,132,800	1,132,800
Depreciation		1,062,000	1,062,000	1,062,000
Income before tax		637,200	637,200	637,200
Less: Tax		140,184	140,184	140,184
Net Income		497,016	497,016	497,016
Add: Depreciation		1,062,000	1,062,000	1,062,000
Recovery of working capital				354,000
After tax salvage value				193,284
Cash flow	(3,540,000)	1,559,016	1,559,016	2,106,300
PVF	1	0.854700855	0.730513551	0.624370556
PV of cash flows	(3,540,000)	1,332,492	1,138,882	1,315,112
NPV	246,486.32