Quad Enterprises is considering a new three-year expansion project that requires
ID: 2777667 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,110,000 in annual sales, with costs of $799,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project.
If the required return is 12 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.)
If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)Explanation / Answer
Calculation of depreciation tax shield
year
1
2
3
Depreciation basis
2790000
2790000
2790000
Depreciation rate 1/3
33.33%
44.45%
14.81%
Depreciation
929907
1240155
413199
x tax rate 35%
35%
35%
35%
Depreciation Tax shield
325467.45
434054.25
144619.65
Calculation of net salvage value
Book value = cost of asset x last year macrs rate
= 2,790,000 x7.41%
= 206,739
Net salvage value = salvage value – (salvage value – book value) x tax rate
= 225,000 – (225,000-206,739) x35%
= 218,608.65
Cash flows:
Year
0
1
2
3
initial cost of investment
-2790000
Sales revenue
2110000
2110000
2110000
(-) cost of sales
-799000
-799000
-799000
EBIT
1311000
1311000
1311000
(-) taxes 35%
-458850
-458850
-458850
Cash income
852150
852150
852150
Depreciation tax benefit
325467.45
434054.25
144619.65
net salvage value
218608.65
Working capital
-330000
0
0
330000
Net Cash flows
-3120000.00
1177617.45
1286204.25
1545378.30
Net present value
year
Cash flow
PV factor 12%
PV
0
-3120000.00
1.0000
-3120000.00
1
1177617.45
0.8929
1051444.15
2
1286204.25
0.7972
1025354.15
3
1545378.30
0.7118
1099969.75
NPV
56768.05
year
1
2
3
Depreciation basis
2790000
2790000
2790000
Depreciation rate 1/3
33.33%
44.45%
14.81%
Depreciation
929907
1240155
413199
x tax rate 35%
35%
35%
35%
Depreciation Tax shield
325467.45
434054.25
144619.65