(Use this problem to answer Q1.) Quad enterprises is considering a new three-yea
ID: 2761299 • Letter: #
Question
(Use this problem to answer Q1.) Quad enterprises is considering a new three-year expansion project that requires and 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 sale, with costs of $815,000. If the tax rate is 35 percent, what is the OCF for this project? q1. In the previous problem, suppose the required return on the project is 12%. What is the project's NPV? Please show all work.
Explanation / Answer
Depreciation = 2900000/3= 966666.67
Income before tax = 2190000-815000-966666.67 = 408333.33
Income after tax = 408333.33 (1 -.35 ) = 265416.67
A)OCF = Income after tax +depreciation
= 265416.67 + 966666.67
= $ 1,232,083.34
Present value of OCF = PVAF@12%,3 *OCF
= 2.40183 * 1232083.34
= $ 2959256.29
NPV = 2959256.29- 2900000 =$ 59256.29
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