Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.56 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 $207277 at the end of the project. The project is estimated to generate $2061404 in annual sales, with costs of $815049. The project requires an initial investment in net working capital of $369999. If the tax rate is 38 percent and the required return on the project is 11 percent, what is the project's NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" 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		-2560000
Initial working capital		-369999
=Initial Investment outlay		-2929999
Sales			2061404	2061404	2061404
Profits	Sales-variable cost		1246355	1246355	1246355
-Depreciation	Cost of equipment/no. of years		-853333.333	-853333.33	-853333.33
=Pretax cash flows			393021.6667	393021.667	393021.667
-taxes	=(Pretax cash flows)*(1-tax)		243673.4333	243673.433	243673.433
+Depreciation			853333.3333	853333.333	853333.333
=after tax operating cash flow			1097006.767	1097006.77	1097006.77
reversal of working capital					369999
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				128511.74
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					498510.74
Total Cash flow for the period		-2929999	1097006.767	1097006.77	1595517.51
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-2929999	988294.3844	890355.301	1166628.65
NPV=	Sum of discounted CF=	115279