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