Quad Enterprises is considering a new three-year expansion project that requires
ID: 2742835 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2, 110,000 in annual sales, with costs of $805,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 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? (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.) If the required return is 12 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.)Explanation / Answer
cash flow year 0 = 2790000 + 330000 = 3120000
deprication per year = 2790000/3 = 930000
cash flow year 1
= (2110000 - 805000 - 930000) * (1-0.35) + 930000
= 1173750
cash flow year 2 = 1173750
csh flow year 3 = 1173750 + 225000 * (1-0.35) + 330000 = 1650000
NPV = -3120000 + 1173750/1.12 + 1173750/1.12^2 + 1650000/1.12^3
= 38134.79