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