Question

uad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.16 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $168,000. The project requires an initial investment in net working capital of $240,000. The project is estimated to generate $1,920,000 in annual sales, with costs of $768,000. The tax rate is 22 percent and the required return on the project is 16 percent. |

What is the project's Year 0 net cash flow? |

What is the project's Year 1 net cash flow? |

What is the project's Year 2 net cash flow? |

What is the project's Year 3 net cash flow? |

What is the NPV? |

Answer #1

initial cost is 2160000

salvage value = 168000

depreciable value = 1992000

depreciation per year = 1992000/3 = 664000

year 0 cash flow is initial investment + working capital

= 2160000+240000= 2400000

calculation of operating cash flows

sales | 1920000 | |

less | costs | 768000 |

less | depreciation | 664000 |

PBT | 488000 | |

less | tax @22% | 107360 |

PAT | 380640 | |

add | depreciation | 664000 |

cash flows | 1044640 |

cash flows from year 1 and 2 will be 1044640

cash flow for year 3 = 1044640+240000+168000= 1452640

calculation of npv

npv is pv of cash flows less initial investment

discount rate = 16%

year | cash flows | discount @ 16% | pv of cash flows |

0 | -2400000 | 1 | -2400000 |

1 | 1044640 | 0.8620689655 | 900551.7241 |

2 | 1044640 | 0.7431629013 | 776337.6932 |

3 | 1452640 | 0.6406576735 | 930644.9629 |

npv | 207534.3803 |

npv is 207534

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