Quad Enterprises is considering a new three-year expansion project that requires
ID: 2727897 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,030,000 in annual sales, with costs of $725,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $285,000 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? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)
If the required return is 15 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.55 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,030,000 in annual sales, with costs of $725,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $285,000 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? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)
Explanation / Answer
a calculation of cash flows a sales 2,030,000 less b costs 725,000 c depreciation 850,000 d cash flows ( a - b - c ) 455,000 e tax at 35 % of d 159,250 f cash flows after tax 295,750 g net cash flows ( f + c ) 1,145,750 year 0 1 2 3 cash flows per year 2,550,000 1,145,750 1,145,750 1,145,750 working capital 250,000 250,000 salvage value 185,250 net cash flows 2,800,000 1,145,750 1,145,750 1,581,000 calculation of depreciation depreciation cost / number of years of life of the project depreciation 2550000 / 3 depreciation 850,000 calculation of salvage value of the project salvage value sale proceeds - tax amount salvage value 285000 - 35 % salvage value 185,250 working capital invested in year 1 will be received in year 3 b calculation of net present value of the project a year 1 2 3 b net cash flows 1,145,750 1,145,750 1,581,000 c present value return at 15 % 0.869565217 0.756143667 0.657516232 d present value cash flows ( b * c ) 996,304 866,352 1,039,533 e total present value 2,902,189 net present value present value of cash inflows - cash outflow of year 1 net present value 2902189 - 2800000 net present value 102,189