Question

# Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...

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.)

 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

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