Question

All answers must be entererd as formulas

CHAPTER 8 Saved Help Save & Exit Submit A1 В A С D G H I J Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 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 $2,190,000 in annual sales, with costs of $815,000. The tax rate is 21 percent. If the required return is 12 percent, what is the project's NPV? 4 2,900,000 2,190,000 815,000 21% Asset investment 6 $ 7 Estimated annual sales $ Costs 8 Таx rate Project and asset life Required return 9 10 12% 11 12 13 14 Complete the following analysis. Do not hard code values in your calculations. 15

Answer 1

NPV is the difference between present value of cash flows and initial investment at required rate of return.

Depreciation is added back to net income to calculate OCF because depreciation is a non-cash expense.

Year	0	1	2	3
Initial investment	-$2,900,000	$0	$0	$0
Sales	$0	$2,190,000	$2,190,000	$2,190,000
Costs	$0	$815,000	$815,000	$815,000
Depreciation	$0	$966,667	$966,667	$966,667
EBT	$0	$408,333	$408,333	$408,333
Taxes	$0	$85,750	$85,750	$85,750
Net Income	$0	$322,583	$322,583	$322,583
OCF	-$2,900,000	$1,289,250	$1,289,250	$1,289,250
NPV	$196,560.96

Formula and calculation

Year Initial investment Sales Costs Depreciation EBT Taxes Net Income OCF NPV -2900000 2190000 815000 --($B$3/3) =C4-C5-C6 =C7*21% =C7-C8 =B3 =C9+C6 =NPV(12%,C10:E10)+10 2190000 815000 --($B$3/3) =D4-D5-D6 =D7*21% =D7-D8 =D9+D6 2190000 815000 --($B$3/3) =E4-E5-E6 =E7*21% =E7-E8 =E9+E6