Quad Enterprises is considering a new three-year expansion project that requires
ID: 2741116 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3?
If the required return is 10 percent, what is the project's NPV?
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3?
Explanation / Answer
Cash flows:
NPV = $91561.50
Year 0 1 2 3 Initital Investment -2880000 Working capital -360000 Cash savings net of tax 848250 848250 848250 Tax savings on depreciation 336000 336000 336000 Scrap value net of tax 156000 Reversal of Net working capital 360000 Cash flows -3240000 1184250 1184250 1700250 PVF @ 10% 1 0.909 0.826 0.751 Present value -3240000 1076483.25 978190.50 1276887.75