Quad Enterprises is considering a new three-year expansion project that requires
ID: 2653629 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 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 $1,980,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 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?
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 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 $1,980,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 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?
Years Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $Explanation / Answer
Solution-
Years
Cash Flow
Year 0
($2,600,000)
Year 1
$888,500
Year 2
$888,500
Year 3
$1,293,100
Calculation of Annual Deprecation Expense as follow.....
In this condition asset is depreciated bystraight-line to zero over its three-year tax life, after which time it will be worthless, So.....
Annual Deprecation Expense = Cost - Salvage Value / Asset Life
Annual Deprecation Expense = $2,400,000 / 3
Annual Deprecation Expense = $80,000
Calculation of Annual Cash Flow.....
Particular
0
1
2
3
Initial Investment
$2,400,000
Net Operating Working capital
$200,000
Sales Revenue
$1,980,000
$1,980,000
$1,980,000
Less: Operating Cost
($675,000)
($675,000)
($675,000)
Less: Deprecation:
($80,000)
($80,000)
($80,000)
Operating Income before taxes
$1,225,000
$1,225,000
$1,225,000
Less: Taxes (34%)
($416,500)
($416,500)
($416,500)
Operating Income after Tax
$808,500
$808,500
$808,500
Add: Deprecation
$80,000
$80,000
$80,000
Operating Cash Flow
$888,500
$888,500
$888,500
Return of NOWC
$200,000
Sales of Machine
$310,000
Tax on sales (34%)
($105,400)
Net Cash Flow
($2,600,000)
$888,500
$888,500
$1,293,100
Years
Cash Flow
Year 0
($2,600,000)
Year 1
$888,500
Year 2
$888,500
Year 3
$1,293,100