Quad Enterprises is considering a new three-year expansion project that requires
ID: 2730768 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 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.)
Explanation / Answer
Stpe:1 Cash flows in the year 0 Cost of asset $ 2,850,000 Working capital $ 350,000 Free cash flows $ 3,200,000 Stpe:2 Cash flows during the 3 years Year $ 1 $ 2 $ 3 Sales $ 2,130,000 $2,130,000 $2,130,000 Cost $ 825,000 $ 825,000 $ 825,000 Less: depreciation-SLM basis $ 950,000 $ 950,000 $ 950,000 PBT $ 355,000 $ 355,000 $ 355,000 Tax@34% $ 120,700 $ 120,700 $ 120,700 Add: Depreciation $ 825,000 $ 825,000 $ 825,000 Free cash flows $ 945,700 $ 945,700 $ 945,700 Stpe:3 Cash flows in the year 3 Salavage value net of tax $ 155,100 Working capital $ 350,000 Total $ 505,100 Year Cashflows 0 $ (3,200,000) 1 $ 945,700 2 $ 945,700 3 $ 1,450,800