Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.45 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life and is estimated to have a market value of $264,623 at the end of the project. The project is estimated to generate $2,161,299 in annual sales, with costs of $816,399. The project requires an initial investment in net working capital of $392,769. If the tax rate is 34 percent and the required return on the project is 11 percent, what is the project's NPV?

Answer 1

	Computation of NPV
	Year	0	1	2	3
A	Initial investment	-2450000
B	working capital	-392,769			392,769
	Sales		2,161,299	2,161,299	2,161,299
	Cost		816,399	816,399	816,399
	Depreciation		816,667	816,667	816,667
	Profit before tax		528,233	528,233	528,233
	Tax @ 34%		179599.3333	179599.333	179599.3333
	Net income		348,634	348,634	348,634
C	Operating cash flow		1,165,301	1,165,301	1,165,301
D	Post tax salvage value				174651.18
	264,623*(1-34%)
E	Net cash flow	-2,842,769	1,165,301	1,165,301	1,732,721
F	PVIF @ 11%	1	0.900900901	0.81162243	0.731191381
G	Present value	(2,842,769.00)	1,049,820.42	945,784.16	1,266,950.55	419,786.13
	NPV =	419,786.13
	answer =	419,786.13