Quad Enterprises is considering a new three-year expansion project that requires

Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $215,000 at the end of the project. If the tax rate is 30 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.) Year 0 Year 1 Year 2 Year 3 $-3040000 If the required return is 13 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

a. Years Cash flow Year 0 $       -30,40,000 Year 1             11,86,500 Year 2             11,86,500 Year 3             16,47,000 Working: # 1 Years 0 1 2 3 Fixed asset Investment a       -27,30,000 Net Working capital investment b         -3,10,000 Sales 20,90,000          20,90,000 20,90,000 Cost of sales -7,85,000           -7,85,000 -7,85,000 Depreciation -9,10,000           -9,10,000 -9,10,000 Profit Before tax     3,95,000             3,95,000     3,95,000 Tax Expense -1,18,500           -1,18,500 -1,18,500 Net Profit     2,76,500             2,76,500     2,76,500 Depreciation     9,10,000             9,10,000     9,10,000 Operating cash flow c 11,86,500          11,86,500 11,86,500 After tax sale of machine d     1,50,500 Release of Working capital e     3,10,000 Net Cash flow a+b+c+d+e       -30,40,000 11,86,500          11,86,500 16,47,000 # 2 Depreciation Expense = (Cost - Salvage Value)/useful life = (2730000-0)/3 =           9,10,000 # 3 After tax sale of machine = Sales Price *(1-Tax Rate) = 215000*(1-0.30) =           1,50,500 b. NPV $         80,657.16 Working: # 1 Year Cash flow Discount factor @ 13% Present Value 0 $       -30,40,000              1.0000 -30,40,000.00 1 $         11,86,500              0.8850    10,50,000.00 2 $         11,86,500              0.7831       9,29,203.54 3 $         16,47,000              0.6931    11,41,453.62 NPV          80,657.16

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