Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,790,000 in annual sales, with costs of $684,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 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? (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 12 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

Annual Net Income:
Annual sales		1790000
Less: Annual cost		684000
Before tax Income		1106000
Less: tax @ 21%		232260
After tax income		873740
Cashflows:
			YEar0	Year1	YEar2	Year3
Initial investment			-2290000
Investment of WC			-410000
After tax income				873740	873740	873740
Tax shield on dep				480900
(2290000*21%)
Release in WC						410000
After tax salvage value						331800
(420000-21%)
Cash flows			-2700000	1354640	873740	1615540
NPV
			YEar0	Year1	YEar2	Year3
Cashflows			-2700000	1354640	873740	1615540
PVF at 12%			1	0.892857	0.797194	0.71178
Present value			-2700000	1209500	696540.2	1149909
NPV			355950