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

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Quad Enterprises is considering a new three-year expansionproject that requires an initial fixed asset investment of $2.94million. The fixed asset will be depreciated straight-line to zeroover its three-year tax life, after which time it will beworthless. The project is estimated to generate $2057308 in annualsales, with costs of $823420. If the tax rate is 32 percent and therequired return on the project is 11 percent, what is the project'sNPV? (Negative amount should be indicated by a minus sign. Do notround intermediate calculations and round your final answer to thenearest dollar amount. Omit the "$" sign and commas in yourresponse. For example, $123,456.78 should be entered as123457.)

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4.4 Ratings (937 Votes)

Time line		0	1	2	3



Cost of new machine		-2940000

=Initial Investment outlay		-2940000


Sales			2057308	2057308	2057308
Profits	Sales-variable cost		1233888	1233888	1233888


-Depreciation	Cost of equipment/no. of years		-980000	-980000	-980000

=Pretax cash flows			253888	253888	253888
-taxes	=(Pretax cash flows)*(1-tax)		172643.84	172643.84	172643.84
+Depreciation			980000	980000	980000
=after tax operating cash flow			1152643.84	1152643.84	1152643.84




+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					0

Total Cash flow for the period		-2940000	1152643.84	1152643.84	1152643.84
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-2940000	1038417.874	935511.598	842803.242
NPV=	Sum of discounted CF=	-123267

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Transcribed Image Text

Quad Enterprises is considering a new three-year expansionproject that requires an initial fixed asset investment of $2.94million. The fixed asset will be depreciated straight-line to zeroover its three-year tax life, after which time it will beworthless. The project is estimated to generate $2057308 in annualsales, with costs of $823420. If the tax rate is 32 percent and therequired return on the project is 11 percent, what is the project'sNPV? (Negative amount should be indicated by a minus sign. Do notround intermediate calculations and round your final answer to thenearest dollar amount. Omit the "$" sign and commas in yourresponse. For example, $123,456.78 should be entered as123457.)