Quad Enterprises is considering a new three-year expansion project that requires
ID: 2723478 • 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 falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. 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 required return is 10 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
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Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. 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.
Explanation / Answer
Calculation of Cash flow Year Initial Investment in fixed asset Net working capital Investment Salvage value of fixed asset Sales Operating cost Depreciation Net Income Tax Profit after tax Net Cash flow A B C D E F G = D-E-F H = G * 0.35 I = G - H A + B + C+ I + F 0 -$28,80,000.00 -$3,60,000.00 -$32,40,000.00 1 $21,40,000.00 $8,23,000.00 $9,59,904.00 $3,57,096.00 $1,24,983.60 $2,32,112.40 $11,92,016.40 2 $21,40,000.00 $8,23,000.00 $12,80,160.00 $36,840.00 $12,894.00 $23,946.00 $13,04,106.00 3 $3,60,000.00 $2,40,000.00 $21,40,000.00 $8,23,000.00 $4,26,528.00 $8,90,472.00 $3,11,665.20 $5,78,806.80 $16,05,334.80 Calculation of depreciation on fixed asset of $2.88 million Year Depreciation rate Depreciation 1 33.33% 959904 2 44.45% 1280160 3 14.81% 426528 Calculation of NPV of the project at 10% required return Year Net Cash flow PV Factor at 10% Present Value of cash flow 0 -$32,40,000.00 1 -$32,40,000.00 1 $11,92,016.40 0.909090909 $10,83,651.27 2 $13,04,106.00 0.826446281 $10,77,773.55 3 $16,05,334.80 0.751314801 $12,06,111.80 NPV $1,27,536.62