Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 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 $2057308 in annual sales, with costs of $823420. If the tax rate is 32 percent and the required return on the project is 11 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" 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		-2940000
=Initial Investment outlay		-2940000
Sales			2057308	2057308	2057308
Profits	Sales-variable cost		1233888	1233888	1233888
-Depreciation	Cost of equipment/no. of years		-980000	-980000	-980000
=Pretax cash flows			253888	253888	253888
-taxes	=(Pretax cash flows)*(1-tax)		172643.84	172643.84	172643.84
+Depreciation			980000	980000	980000
=after tax operating cash flow			1152643.84	1152643.84	1152643.84
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					0
Total Cash flow for the period		-2940000	1152643.84	1152643.84	1152643.84
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-2940000	1038417.874	935511.598	842803.242
NPV=	Sum of discounted CF=	-123267