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