Quad Enterprises is considering a new three-year expansion project that requires
b. If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
Answer and Explanation:
The computation is shown below
Particulars 0 1 2 3
cost of project -$2,410,000
Investment in
working capital $-380,000
sales $1,775,000 $1,775,000 $1,775,000
less: cost -$672,000 -$672,000 -$672,000
less: depreciation -$2,410,000 $0 $0
operating profit -$1,307,000 $1,103,000 $1,103,000
less tax at 23% -$300,610 $253,690 $253,690
after tax profit -$1,006,390 $849,310 $849,310
add depreciation $2,410,000 $0 $0
after tax sale proceeds of machine $288,750
recovery of working capital $380,000
1. Net operating cash flow
-$2,790,000 $1,403,610 $849,310 $1,518,060
present value of net operating cash flow is
= net operating cash flow ÷ (1 + r)^n
r = 9%
-$2,790,000 $1,287,715.6 $714,847.235 $1,172,220.85
2Net present value = sum of the present value of operating cash flow $384,783.69
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