Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.27 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,800,000 in annual sales, with costs of $692,000. The project requires an initial investment in net working capital of $430,000, and the fixed asset will have a market value of $450,000 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 10 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.)

Answer 1

Annual net income aftere tax:
Annual revenue		1800000
less: Cost		692000
Before tax income		1108000
Less: tax @ 23%		254840
After tax income		853160
Cashflows			YEar0	YEar1	YEar2	YEar3
Initial investment			-2270000
Investment of WC			-430000
Net Income				853160	853160	853160
Tax shield on dep (2270000*23%)				522100
After tax salvage (450000-23%)						346500
Release of WC						430000
Net cashflows			-2700000	1375260	853160	1629660
PVf at 10%			1	0.909091	0.826446	0.751315
Present value of cashflows			-2700000	1250236	705090.9	1224388
NPV			479715