Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,160,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project. If the tax rate is 34 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)

  

Years	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV?

$

Answer 1

Annual cash inflows
Annual sales			2160000
Less: Cost			855000
Less: Annual dep (2940000/3)			980000
Net income before tax			325000
Less: tax @ 34%			110500
After tax income			214500
Add: Dep			980000
Annual cashflows			1194500
			Year0	YEar1	YEar2	YEar3
Initial Investment			-2940000
WC investment			-380000
Cash flows				1194500	1194500	1194500
Salvage after tax (250000*66%)						165000
WC release						380000
Cash flows			-3320000	1194500	1194500	1739500
PVF at 10%			1	0.909091	0.8264463	0.751315
Present value of CF			-3320000	1085909	987190.08	1306912
NPV			60011