Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,765,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345,000 at the end of the project. |

a. |
If
the tax rate is 21 percent, what is the project’s Year 0 net cash
flow? Year 1? Year 2? Year 3? (Do not round intermediate
calculations and enter your answers in dollars, not millions of
dollars, e.g., 1,234,567. A negative answer should be indicated by
a minus sign.) |

b. |
If the required return
is 11 percent, what is the project's NPV? |

Answer #1

Year | 0 | 1 | 2 | 3 |

Investment | (2,370,000.00) | |||

Investment in Working Capital | (360,000.00) | |||

Annual Sales | 1,765,000.00 | 1,765,000.00 | 1,765,000.00 | |

Costs | 675,000.00 | 675,000.00 | 675,000.00 | |

Depreciation | 790,000.00 | 790,000.00 | 790,000.00 | |

Profit before tax | 300,000.00 | 300,000.00 | 300,000.00 | |

Less: Tax | 63,000.00 | 63,000.00 | 63,000.00 | |

Net Income | 237,000.00 | 237,000.00 | 237,000.00 | |

Add: Depreciation | 790,000.00 | 790,000.00 | 790,000.00 | |

Operating Cash flow | 1,027,000.00 | 1,027,000.00 | 1,027,000.00 | |

Recovery of Working capital | 360,000.00 | |||

After tax salvage value | 272,550.00 | |||

Cash
flows |
(2,730,000.00) |
1,027,000.00 |
1,027,000.00 |
1,659,550.00 |

PVF | 1.00000 | 0.90090 | 0.81162 | 0.73119 |

PV of cash flows | (2,730,000.00) | 925,225.23 | 833,536.24 | 1,213,448.66 |

NPV |
242,210.12 |

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