Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 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 $295485 at the end of the project. The project is estimated to generate $2267496 in annual sales, with costs of $866421. The project requires an initial investment in net working capital of $390729. If the tax rate is 31 percent and the required return on the project is 11 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

Time line		0	1	2	3
Cost of new machine		-2640000
Initial working capital		-390729
=Initial Investment outlay		-3030729
Sales			2267496	2267496	2267496
Profits	Sales-variable cost		1401075	1401075	1401075
-Depreciation	Cost of equipment/no. of years		-880000	-880000	-880000
=Pretax cash flows			521075	521075	521075
-taxes	=(Pretax cash flows)*(1-tax)		359541.75	359541.75	359541.75
+Depreciation			880000	880000	880000
=after tax operating cash flow			1239541.75	1239541.75	1239541.75
reversal of working capital					390729
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				203884.65
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					594613.65
Total Cash flow for the period		-3030729	1239541.75	1239541.75	1834155.4
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-3030729	1116704.279	1006039.89	1341118.62
NPV=	Sum of discounted CF=	433134