Question

Problem 10-10 Calculating Project NPV (LO1) Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 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 $1,785,000 in annual sales, with costs of $695,000. The tax rate is 25 percent and the required return on the project is 12 percent. What is the project's NPV? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g., 1,234,567.89.) NPV

Answer 1

The initial investment that is CF0 is = $231,0000

The rate of depreciation as per the straight line method is = $231,0000/ 3

= $770,000
The cash flows of the project from year 1 to year 3 is :

= ( sales - costs ) (1 - tax rate) + depreciation tax shield

Year 1: ( $1,78,5000 - $695,000) * (1 - 0.25) + $77,0000 * 0.25

= $817,500 + $192500

= $101,0000

The cash flows are :

CF0 =( $231,0000)

CF1 = $101,000

CF2= $101,000

CF3= $101,000

The NPV at 12 % is,

NPV = $115,849.58 ( ROUNDED OFF TO TWO DECIMAL PLACES)