Question

Quad enterprises is considering a new three year expansion project that requires an initial fixed asset investment of 2.32 million. The fixex assest qualifies for 100 percent bonus depreciation in the first year.
The project is estimated to generate $1.735 million in annual sales with costs of $650,000. The project requires an initial investment in net working capital of $250,000 and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent.

what is the year zero cash flow? year 1? year 2? year 3?

If the required return is 12 percent what is the NPV?

Answer 1

Initial outlay = Cost + working capital

=-2,320,000-250000

=-2570000

Year 1 Cash flow = Tax shield on depreciation + (Sales -cost)*(1-Tax)

=2320,000*21% + (1735,000-650,000)*(1-0.21)

=1344350

Year 2 Cash flow = (Sales -cost)*(1-Tax)

= (1735,000-650,000)*(1-0.21)

= 857150

Year 3 cash flow = (Sales -cost)*(1-Tax)+ Salvage*(1-Tax)+ working capital recovery

= (1735,000-650,000)*(1-0.21)+ 180000*(1-0.21)+ 250000

=999350+ 250000

=

1249350

NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n

=

-2570000+ 1344350.00/1.12^1 + 857150/1.12^2 + 1249350/1.12^3

=$202,889.88