Quad Enterprises is considering a new three-year expansion project that requires
ID: 2737059 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,120,000 in annual sales, with costs of $815,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project. If the tax rate is 30 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 $ -3,160,000 correct
Year 1 $ 1,172,500 incorrect
Year 2 $ 1,172,500 incorrect
Year 3 $ 1,402,499 incorrect
If the required return is 12 percent, what is the project's NPV?
Explanation / Answer
Calculation of Net cash flow Particular Year 0 Year 1 Year 2 Year 3 Initial Investment -2820000 Net working capital -340000 Sales 2120000 2120000 2120000 Less: Cost 815000 815000 815000 Net profit 1305000 1305000 1305000 Less Tax@30% 391500 391500 391500 Net proft after tax 913500 913500 913500 Selvage value 230000 Less: Tax on selvage @30% 69000 Working capital 340000 Tax save on depreciation 282000 282000 282000 Net cash flow -3160000 1195500 1195500 1696500 Calculation of NPV Year Cash flow in $ PVAF 12% Value 0 -3160000 1 -3160000 1 1195500 0.8929 1067410.71 2 1195500 0.7972 953045.281 3 1696500 0.7118 1207535.19 NPV 67991.1853