Quad Enterprises is considering a new three-year expansion project that requires

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

The following table shows year wise value of cash flow

Year zero = -( cost of asset+ working capital)

Year one and two = (Sales-cost)x (1-tax)+ (depreciation x tax)

Year three = (Sales-cost)x (1-tax)+ (depreciation x tax) + market value of asset

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