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 $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.) Years Year 0 Year 1 Year 2 Year 3 If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

Year 0 1 2 3 A Annual Sales 2140000 2140000 2140000 B Costs 835000 835000 835000 C Depreciation ($2.88m/3) 960000 960000 960000 D Profit before Tax (A-B-C) 345000 345000 345000 E Taxes 120750 120750 120750 F Profit After Tax (C-D) 224250 224250 224250 G Depreciation ($2.88m/3) 960000 960000 960000 H Cash Flow After Tax (F+G) 1184250 1184250 1184250 I Cost of Fixed Asset -2880000 J Net Working Capital -360000 K Market Value of asset at the end 240000 L Taxes 84000 M Market Value after taxes (K-L) 156000 N Net Cash Flow -3240000 1184250 1184250 1340250 NPV: Year Net Cash Flow -3240000 1184250 1184250 1340250 PVF (10%) 1 0.90909091 0.826446281 0.7513148 PV of CF -3240000 1076590.91 978719.0083 1006949.7 NPV -177740.42

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