Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million.

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 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 $2,110,000 in annual sales, with costs of $805,000. The tax rate is 35 percent and the required return on the project is 12 percent. What is the project’s NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

 

Explanation:

Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get:

OCF = (Sales − Costs)(1 − TC) + TC(Depreciation)

OCF = ($2,110,000 − 805,000)(1 − .35) + .35($2,790,000 / 3)

OCF = $1,173,750

Since we have the OCF, we can find the NPV as the initial cash outlay plus the PV of the OCFs, which are an annuity, so the NPV is:

NPV = −$2,790,000 + $1,173,750(PVIFA12%,3)

NPV = $29,149.45