Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.49 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,010,000 in annual sales, with costs of $705,000. The project requires an initial investment in net working capital of $230,000, and the fixed asset will have a market value of $295,000 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 16 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

an initial fixed asset investment = $2.49 million = $2,490,000

initial investment in net working capital = $230,000

year 0 cash flow , c0= -an initial fixed asset investment - initial investment in net working capital = -2490000-230000 = -2720000

year 1 cash flow , c1 = ( sales - costs)*(1-Tax rate) + (Tax rate*depreciation) = (2010,000-705,000)*(1-0.34) + (0.34*(2490000/3))

= 1305,000*0.66 + (0.34*830,000) = 861,300 + 282,200 = $1,143,500

year 2 cash flow, c2 = c1 = $1,143,500

year 3 cash flow, c3 = c1 + initial investment in net working capital + market value of fixed asset at the end of 3rd year + (0 - 295,000)*0.34

c3 = 1,143,500 + 230,000 + 295,000 -100,300 = $1,568,200

Required return , r = 16% = 0.16

NPV = [ (c1/(1.16)¹) + (c2/(1.16)²) + (c3/(1.16)³)] - c0

= [ (1,143,500/(1.16)¹) + (1,143,500/(1.16)²) + (1,568,200/(1.16)³)] - 2720000 = 2,840,262 -2,720,000 = $120,262