Quad Enterprises is considering a new three-year expansion project that requires
ID: 2777502 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,990,000 in annual sales, with costs of $685,000. The project requires an initial investment in net working capital of $210,000, and the fixed asset will have a market value of $305,000 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?
Explanation / Answer
Initial fixed Working Solvage Annual Net Year Assets Capital Value Income Cashflows 0 $ (2,430,000.00) $ 210,000.00 $ (2,220,000.00) 1 $ 1,305,000.00 $ 1,305,000.00 2 $ 1,305,000.00 $ 1,305,000.00 3 $ 305,000.00 $ 1,305,000.00 $ 1,610,000.00 Annual Income: Sales $ 1,990,000.00 Lase: Costs $ 685,000.00 Net Income $ 1,305,000.00