Question

Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its three year tax life. The project is estimated to generate $1,790,000 in annual sales, with the costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. A.) If the tax rate is 21 percent, what is the project’s Year 0 (zero) net cash flow? Year2? Year 3? B.) If the required return is 12 percent, what is the projects NPV?

Answer #1

0 | 1 | 2 | 3 | |

Fixed Asset Investment | -2290000 | |||

Working Capital | -410000 | |||

After tax Sales net Cost | 861100 | 861100 | 861100 | |

Tax Saving On Depreciation | 160300 | 160300 | 160300 | |

After Tax Salvage Value | 331800 | |||

Working Capital Recaptured | 410000 | |||

Net Cash Flow | -2700000 | 1021400 | 1021400 | 1763200 |

PV factor | 1 | 0.8929 | 0.7972 | 0.7118 |

Present Value | -2700000 | 911,964.29 | 814,253.83 | 1,255,010.93 |

NPV |
281,229.05 |

Workings

0 | 1 | 2 | 3 | |

Fixed Asset Investment | -2290000 | |||

Working Capital | -410000 | |||

After tax Sales net Cost | (1790000-700000)*(1-0.21) | (1790000-700000)*(1-0.21) | (1790000-700000)*(1-0.21) | |

Tax Saving On Depreciation | (2290000/3)*0.21 | (2290000/3)*0.21 | (2290000/3)*0.21 | |

After Tax Salvage Value | 420000*(1-0.21) | |||

Working Capital Recaptured | 410000 |

Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.29
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 $1,810,000 in
annual sales, with costs of $720,000. The tax rate is 25 percent
and the required return on the project is 13 percent. What is the
project’s NPV?

Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.29
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 $1,715,000 in
annual sales, with costs of $625,000. The tax rate is 21 percent
and the required return on the project is 10 percent. What is the
project’s NPV? (Do not round intermediate
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project that requires an initial fixed asset investment of $2.29
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 $1,715,000 in
annual sales, with costs of $625,000. The tax rate is 21 percent
and the required return on the project is 10 percent. What is the
project’s NPV? (Do not round intermediate
calculations....

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project that requires an initial fixed asset investment of $2.29
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 $1,715,000 in
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project that requires an initial fixed asset investment of $2.29
million. The fixed asset will be depreciated straight-line to zero
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