Quad Enterprises is considering a new three-year expansion project that requires
ID: 2740825 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,150,000 in annual sales, with costs of $831,000. The project requires an initial investment in net working capital of $370,000, and the fixed asset will have a market value of $245,000 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? If the required return is 11 percent, what is the project's NPV?
Explanation / Answer
Particulars Year 0 year 1 Year 2 Year 3 Cost -2910000 Working capital -370000 Annual sales 2150000 2150000 2150000 Less: Costs 831000 831000 831000 Benefit 1319000 1319000 1319000 Depreciation rate 33.33% 44.45% 14.81% Deprecaition 969903 1293495 430971 Earning Before Tax 349097 25505 888029 Tax @30% 104729.1 7651.5 266408.7 Earnings After Tax 244367.9 17853.5 621620.3 Add: Depreciation 969903 1293495 430971 Cash Flows 1214270.9 1311348.5 1052591.3 Working capital 370000 Cash Flows -3280000 1214270.9 1311348.5 1422591.3 Discount @11% 1 0.900900901 0.811622433 0.731191381 Present value of cash flows -3280000 1093937.748 1064319.86 1040186.498 Net Present Value -81555.9