Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 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 $1,765,000 in annual sales, with costs of $675,000. The tax rate is 21 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.)

Answer 1

Time line		0	1	2	3
Cost of new machine		-2370000
=Initial Investment outlay		-2370000
						100.00%
Sales			1765000	1765000	1765000
Profits	Sales-variable cost		1090000	1090000	1090000
-Depreciation	Cost of equipment/no. of years		-790000	-790000	-790000	0	=Salvage Value
=Pretax cash flows			300000	300000	300000
-taxes	=(Pretax cash flows)*(1-tax)		237000	237000	237000
+Depreciation			790000	790000	790000
=after tax operating cash flow			1027000	1027000	1027000
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					0
Total Cash flow for the period		-2370000	1027000	1027000	1027000
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928
Discounted CF=	Cashflow/discount factor	-2370000	916964.2857	818718.1122	730998.3145
NPV=	Sum of discounted CF=	96680.71