Quad Enterprises is considering a new three-year expansion project that requires
ID: 2730028 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,040,000 in annual sales, with costs of $735,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 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 $ -2840000.00
Year 1 $ 1153700.00
Year 2 $ 1153700.00
Year 3 $
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.)
NPV $
Explanation / Answer
Calculation of NPV of the project
Year
Particulars
Cash flow
Disc Factor @ 15%
Discounted Cash Flow
0
Cash Outflow
(2,840,000)
1
(2,840,000.00)
1
Net Cash Flow
1,153,700
0.8696
1,003,257.52
2
Net Cash Flow
1,153,700
0.7561
872,312.57
3
Net Cash Flow
1,693,700
0.6575
1,143,247.50
Net Present Value
178,817.59
Calculation of Year 3 Cash Flow
Particulars
Amount (in $)
Sales
2,040,000
Less: Cost
735,000
Less: Depreciation
(2,580,000/3)
860,000
PBT
445,000
Less: Tax @34%
151,300
PAT
293,700
Add: Depreciation
860,000
Cash Flow after tax
1,153,700
Add: Salvage value of Fixed Asset
280,000
Add: Recovery of Working Capital
260,000
Net Cash Flow
1,693,700
Year
Particulars
Cash flow
Disc Factor @ 15%
Discounted Cash Flow
0
Cash Outflow
(2,840,000)
1
(2,840,000.00)
1
Net Cash Flow
1,153,700
0.8696
1,003,257.52
2
Net Cash Flow
1,153,700
0.7561
872,312.57
3
Net Cash Flow
1,693,700
0.6575
1,143,247.50
Net Present Value
178,817.59