Quad Enterprises is considering a new three-year expansion project that requires
ID: 2715233 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project.
If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3?
If the required return is 10 percent, what is the project's NPV?
Explanation / Answer
Cash Outflow at T = 0 = 2.88 miliion + 0.36 million = 3.24 million
Cash Inflow T =1 = (2140000 - 835000) * ( 1 -0.35 ) + 2880000/3 * 0.35 = 1184250
Cash Inflow T =2 = (2140000 - 835000) * ( 1 -0.35 ) + 2880000/3 * 0.35 = 1184250
Cash Inflow T =3 = (2140000 - 835000) * ( 1 -0.35 ) + 2880000/3 * 0.35 + 240000 ( 1 - 0.35 ) + 360000 = 1700250
NPV = -3240000 + 1076591 + 978719 + 1277423 = $ 92733