Question

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

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?

Homework Answers

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
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