Quad Enterprises is considering a new three-year expansion project that requires
ID: 2772092 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.97 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,170,000 in annual sales, with costs of $847,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project.
If the required return is 9 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
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Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.97 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,170,000 in annual sales, with costs of $847,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project.
Explanation / Answer
Net Cash Flows
Cash Flow($ in Millions)
Year 0
Year 1
$ 859,950
Year 2
$ 859,950
Year 3
$ 859,950
Net Present Value = - $ 986,287.09
Working
Initial Fixed Investment = $2,970,000
Fixed Asset Falls in 3 year MACRS class.
Estimated Annual Sales = $ 2,170,000
Estimated Costs = $ 847,000
Initial Net Working Capital = $ 390,000
Market Value at the end of project = $ 255,000
Year 0
Initial Investment in Fixed Assets
2,970,000
Initial Investment in net WC
390,000
Year 12170
Estimated Annual Sales
2,170,000
Less Estimated Costs
847,000
Less Depreciation (MACRS -33.33%) D
989,901
Pre Tax Flow
333,099
Post Tax Flow (Pretax * (1-0.35))
216,514.35
Add back of Depreciation (D * (1-Tax)
643,435.65
Net Operating Cash Flows
859,950
Year 1
Estimated Annual Sales
2,170,000
Less Estimated Costs
847,000
Less Depreciation (MACRS -44.45%)
1,320,165
Pre Tax Flow
2,835
Post Tax Flow (Pretax * (1-0.35)
1,842.75
Add back of Depreciation (D * (1-Tax)
858,107.25
Net Operating Cash Flows
859,950
Year 2
Estimated Annual Sales
2,170,000
Less Estimated Costs
847,000
Less Depreciation (MACRS -14.81%)
439,857
Pre Tax Flow
883,143
Post Tax Flow (Pretax * (1-0.35)
574,042.95
Add back of Depreciation (D * (1-Tax)
285,907.05
Net Operating Cash Flows
859,950
Require Rate of return r = 9% or 0.09
NPV = - 3,360,000 + 859,950/1.09 + 859,950/1.09^2 + 859,950/1.09^3 + 255,000/1.09^3
= -3,360,000 + 788,944.95 + 723,802.71 + 664,054.05 + 196,911.20
= - $ 986,287.09
Cash Flow($ in Millions)
Year 0
- $3,360,000
Year 1
$ 859,950
Year 2
$ 859,950
Year 3
$ 859,950