Question

1. 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?

2.

Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets 10 mpg. You want to improve gas mileage to save money, and you have enough money to upgrade one vehicle. The upgrade cost will be the same for both vehicles. An upgraded car will get 40 mpg; an upgraded truck will get 12.5 mpg. The cost of gasoline is $3.90 per gallon.

Calculate the annual fuel savings, in gallons, for the truck and car assuming both vehicles are driven 14,000 miles per year. (Round your answers to 2 decimal places, e.g., 32.16.)

Assuming an upgrade is a good idea in the first place, which one should you upgrade? Both vehicles are driven 14,000 miles per year.

Car Truck

Answer 1

fSUM(C14:F14) G14 A В C. E F 1year 1 0 2. 1785000 sales 2 1785000 1785000 695000 3 Less Costs 695000 695000 4 savings depreciation 1090000 1090000 1090000 770000 770000 5 Less 770000 320000 320000 6 ЕBT 320000 tax@25% 80000 80000 7 Less 80000 EAT 8 240000 240000 240000 depreciation 770000 9 ADD 770000 770000 Operating Cash flows 1010000 10 1010000 1010000 11 Cost -2310000 Cash flows 1010000 12 -2310000 1010000 1010000 0.7118 NPV 0.7972 13 pv@12% 0.8929 (23,10,000.00)$ 9,01,785.71 $8,05,165.82 $7,18,898.05 $1,15,849.58 14 present value 15 $ 7,70,000.00 2310000/3 16 Depreciation 17 st LO