Quad Enterprises is considering a new three-year expansion project that requires
ID: 2777496 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $1,980,000 in annual sales, with costs of $695,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 at the end of the project.
If the required return is 18 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.)
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $1,980,000 in annual sales, with costs of $695,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 at the end of the project.
Explanation / Answer
Answer:
In the books of Quad Enterprises:
Initial Investment = $2,400,000
(-) Increase in working capital = $200,000
Net Cash Outflow at Year 0 = ($ -2,200,000)
Particulars
Year 1
Year 2
Year3
Sales
1,980,000
1,980,000
1,980,000
(-) Costs
695,000
695,000
695,000
(-) Depreciation (According to MACRS Schedule for three-year MACRS class)
696,597
929,005
309,529
Sub Total
588,403
355,995
975,471
(-) Tax on above @ 34%
200,057.02
121,038.3
331,660.14
(+) Depreciation (According to MACRS Schedule for three-year MACRS class)
696,597
929,005
309,529
Net Cash Outflow…..
1,084,942.98
1,163,961.7
953,339.86
2.Calculation showing total cash outflow:
Years
Cash Flow
Year 0
$ -2,200,000
Year 1
$ 1,084,942.98
Year 2
$ 1,163,961.7
Year 3
$ 953,339.86
Total Cash Outflow
$ 1,002,244.54
3.Calculation showing NPV:
NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment,
Where R is the rate of return and T is the number of time periods.
Hence, NPV = $ 4,535,614.44
Particulars
Year 1
Year 2
Year3
Sales
1,980,000
1,980,000
1,980,000
(-) Costs
695,000
695,000
695,000
(-) Depreciation (According to MACRS Schedule for three-year MACRS class)
696,597
929,005
309,529
Sub Total
588,403
355,995
975,471
(-) Tax on above @ 34%
200,057.02
121,038.3
331,660.14
(+) Depreciation (According to MACRS Schedule for three-year MACRS class)
696,597
929,005
309,529
Net Cash Outflow…..
1,084,942.98
1,163,961.7
953,339.86