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 | |||||

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