Quad Enterprises is considering a new three-year expansion project that requires
ID: 2452011 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,160,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project. If the tax rate is 34 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3?
Explanation / Answer
Solution:
Year 0 Yera 1 Year 2 Year 3 Initial Investment - 2,940,000 Add: Working capital requiremnet - 380,000 Cash outflow - 3,320,000 Sales 2,160,000 2,160,000 2,160,000 Less: Costs 855,000 855,000 855,000 Less: Depreciation 980,000 980,000 980,000 Earnings before Tax 325,000 325,000 325,000 Less: Tax expense - 34% 110,500 110,500 110,500 Earnings after tax 214,500 214,500 214,500 Add: Depreciation 980,000 980,000 980,000 Cashflow 1,194,500 1,194,500 1,194,500 Add: Termoinal Value net of tax 1,650,000 Cash outflows - 3,320,000 1,194,500 1,194,500 2,844,500