Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.41 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,775,000 in annual sales, with costs of $672,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project. |

a. |
If the tax rate is 23 percent, what is the project’s Year 0 net
cash flow? Year 1? Year 2? Year 3? (A
negative answer should be indicated by a minus sign.
Do not round intermediate calculations and enter your
answers in dollars, not millions of dollars, e.g.,
1,234,567.) |

b. |
If the required return is 9 percent, what is the project's NPV?
(Do not round intermediate calculations and enter your
answers in dollars, not millions of dollars, rounded to two decimal
places, e.g., 1,234,567.89.) |

Year 0 cash flow=

Year 1 Cash Flow=

Year 2 Cash flow =

Year 3 Cash Flow=

NPV=

Answer #1

Year | 0 | 1 | 2 | 3 | |

cost of project | -2410000 | ||||

Investment in working capital | -380000 | ||||

sales | 1775000 | 1775000 | 1775000 | ||

lesscost | 672000 | 672000 | 672000 | ||

less depreciation | 2410000 | 0 | 0 | ||

operating profit | -1307000 | 1103000 | 1103000 | ||

less tax -23% | -300610 | 253690 | 253690 | ||

after tax profit | -1006390 | 849310 | 849310 | ||

add depreciation | 2410000 | 0 | 0 | ||

after tax sale proceeds of machine | 288750 | ||||

recovery of working capital | 380000 | ||||

1- | net operating cash flow | -2790000 | 1403610 | 849310 | 1518060 |

present value of net operating cash flow = net operating cash flow/(1+r)^n r = 9% | -2790000 | 1287715.6 | 714847.235 | 1172220.85 | |

2- | Net present value = sum of present value of operating cash flow | 384783.69 |

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