Quad Enterprises is considering a new three-year expansion project that requires
ID: 2715382 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will have a market value of $246926. The project is estimated to generate $2184050 in annual sales, with costs of $968951. The project requires an initial investment in net working capital (NWC) of $243424 and the same amount of NWC in every year of production. If the tax rate is 23 percent, what is the project's Year 3 net cash flow?
Explanation / Answer
3rd year cash flow is 2060286
Time line 0 1 2 3 Cost of equipment -3000000 Installation cost 0 Total investment in new machine -3000000 Net working capital -242641 -242641 -242641 -242641 =Initial Investment outlay -3242641 sales-cost 1194547 1194547 1194547 -Depreciation MACR Rate* total investment -1000000 -1000000 -1000000 = 194547 194547 194547 -taxes =(savings- depreciation)*(1-tax) 151746.7 151746.7 151746.7 +Depreciation 1000000 1000000 1000000 =after tax operating cash flow 1151747 1151747 1151747 Reversal of Net working capital 970564 Proceeds from sale of assets =selling price*(1 - tax rate) 180616.8 +Salvage book value * tax rate 0 Terminal year non operating cash flows 1151181 Total Cash flow for the period -3242641 1151747 1151747 2060286