Quad Enterprises is considering a new three-year expansion project that requires
ID: 2728355 • 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. 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? (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.) Years Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $ If the required return is 18 percent, what is the project's NPV?
Explanation / Answer
Assume the NWC invested is returned at the end of the project. Details Year 0 Year 1 Year 2 Year 3 Asset Investment (2,400,000) Investment in NWC (200,000) 200,000 Annual sales 1,980,000 1,980,000 1,980,000 Less costs (675,000) (675,000) (675,000) Depreciation (800,000) (800,000) (800,000) Salvage 310,000 Pretax income 505,000 505,000 815,000 Tax @34% (171,700) (171,700) (277,100) Post Tax Income 333,300 333,300 537,900 Add back depreciation 800,000 800,000 800,000 Net Cash flows $ (2,600,000) $ 1,133,300 $ 1,133,300 $ 1,537,900 PV factor @18% 1 0.847 0.718 0.609 PV of Cash flows (2,600,000) 960,424 813,918 936,013 NPV = $ 110,355.56