Question

# uad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment...

 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?

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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