Quad Enterprises is considering a new three-year expansion project that requires
ID: 2777476 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MARCS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 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 9 percent, what is the project's NPV? Please show each step. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MARCS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 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 9 percent, what is the project's NPV? Please show each step.Explanation / Answer
Calculation of depreciation tax shield
year
1
2
3
Depreciation basis
3000000
3000000
3000000
x MACS rate
33.33%
44.45%
14.81%
Depreciation
999900
1333500
444300
x tax rate 30%
30%
30%
30%
Depreciation Tax shield
299970
400050
133290
Calculation of net salvage value
Book value = cost of asset x last year macrs rate
= 3,000,000 x7.41%
= 222,300
Net salvage value = salvage value – (salvage value – book value) x tax rate
= 260,000 – (260,000-222,300) x30%
= 248,690
Cash flows calculation
Year
0
1
2
3
initial cost of investment
-3000000
Sales revenue
2180000
2180000
2180000
(-) cost of sales
-855000
-855000
-855000
EBIT
1325000
1325000
1325000
(-) taxes 30%
-397500
-397500
-397500
Cash income
927500
927500
927500
Depreciation tax benefit
299970
400050
133290
net salvage value
248690
Working capital
-400000
0
0
400000
Net Cash flows
-3400000
1227470
1327550
1709480
Net present value calculation
year
Cash flow
PV factor 9%
PV
0
-3400000
1.0000
-3400000.00
1
1227470
0.9174
1126119.27
2
1327550
0.8417
1117372.28
3
1709480
0.7722
1320032.22
NPV
163523.76
Hence, NPV of the project is 163,523.76.
year
1
2
3
Depreciation basis
3000000
3000000
3000000
x MACS rate
33.33%
44.45%
14.81%
Depreciation
999900
1333500
444300
x tax rate 30%
30%
30%
30%
Depreciation Tax shield
299970
400050
133290