Quad Enterprises is considering a new three-year expansion project that requires
ID: 2650840 • Letter: Q
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, after which time it will be worthless. 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?
$ 16,47,000
If the required return is 13 percent, what is the project's NPV?
NPV $
Years Cash Flow Year 0 $ -3,040,000 Year 1 $ 11,86,500 Year 2 $ 11,86,500 Year 3$ 16,47,000
Explanation / Answer
Years
Cash Flow
Year 0
-$30,40,000
Year 1
$ 11,86,500
Year 2
$ 11,86,500
Year 3
$ 16,47,000
Net Present Value [NPV]
$80,657
Calculations
Calculate of Annual Cash Flow
Annual Sales
20,90,000
Less : Costs
(785,000)
Less: Depreciation [ $27,30,000 / 3 Years ]
(910,000)
Net Income Before Tax
395,000
Less : Tax at 30%
(118,500)
Net Income After Tax
276,500
Add Back : Depreciation
910,000
Annual Cash Flow
1,186,500
Year 0 Cash outflow [Initial Investment ] = $27,30,000 + 310,000 = $30,40,000
Year 1 Cash Flow = $1,186,500
Year 2 Cash Flow = $1,186,500
Year 3 Cash Flow = $1,186,500 + 310,000 + [215,000 x 0.70] = $ 1,647,000
Net Present Value [ NPV]
Net Present Value [ NPV] = Present Value of Annual cash inflows – Initial Investments
= [$1,186,500 x 0.884955] + [$1,186,500 x 0.783146] + [$1,647,000 x 0.693050] - $30,40,000
= $ 1,050,000.00 + 929,203.54 + 1,141,453.62 – 30,40,000
= $80,657.16
= $80,657 [Rounded to whole number]
Years
Cash Flow
Year 0
-$30,40,000
Year 1
$ 11,86,500
Year 2
$ 11,86,500
Year 3
$ 16,47,000