Quad Enterprises is considering a new three-year expansion project that requires
ID: 2762188 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,040,000 in annual sales, with costs of $743,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 at the end of the project.
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,040,000 in annual sales, with costs of $743,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 at the end of the project.
Explanation / Answer
Marginal tax rate 34% Time line 0 1 2 3 Cost of equipment -2580000 +NWC -260000 =Initial Investment outlay -2840000 Sales-cost= 1297000 1297000 1297000 MACR rate 33.33% 44% 14.81% 7.41% -Depreciation =Cost of equipment * MACR %age 859914 1146810 382098 191178 =salvage BV =Pre tax operating Cash flow 437086 150190 914902 -taxes =Pre tax operating CF*(1-tax) 288476.8 99125.4 603835.3 +Depreciation 859914 1146810 382098 =after tax operating cash flow 1148391 1245935 985933.3 Terminal cash flow Reversal of NWC 260000 After taxCash inflow due to sale =selling price* (1 - tax rate) 171600 +salvage value*tax rate 65000.52 Terminal year after tax non operating cash flow = 496600.5 Total Cash flow for the period -2840000 1148391 1245935 1482534