2 Quad Enterprises initial fixed asset investment of $2.27 million. The fixed as

Question

2 Quad Enterprises initial fixed asset investment of $2.27 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 $1,800.000 in annual sales, with costs of $710.000. The tax rate is 23 percent and the required return on the project is 11 percent. What is the project's NPV? (Do not round intermediate calculetions. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, e.g. 1 is considering a new three year expansion project that requires an 234,567.89.)

Explanation / Answer

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

=($2.27million/3)=$756,666.67(Approx)

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

=(1,800,000-710,000)(1-0.23)+(0.23*756,666.67)

=$1,013,333.33(Approx).

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

=$1,013,333.33[1-(1.11)^-3]/0.11

=$1,013,333.33*2.443714715

=$2476297.58

NPV=Present value of inflows-Present value of outflows

=$2476297.58-$2,270,000

=$206297.58(Approx).

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