Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.33 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 $1,735,000 in annual sales, with costs of $645,000. The tax rate is 25 percent and the required return on the project is 10 percent. What is the project’s NPV?

Answer 1

Annual depreciation=(Cost-Salvage value)/USeful Life

=(2.33million/3)=$776,666.67/year(Approx)

Hence annual OCF=(Sales-Costs)(1-tax rate)+Tax savings on Annual depreciation

=(1735000-645000)(1-0.25)+(0.25*776,666.67)

=$1,011,666.67(Approx)

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$1,011,666.67[1-(1.1)^-3]/0.1

=$1,011,666.67*2.486851991

=$2515865.26

NPV=Present value of inflows-Present value of outflows

=$2515865.26-$2,330,000

  =$185865.26(Approx).