Quad Enterprises is considering a new three-year expansion project that requires
ID: 2809499 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.34 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,740,000 in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
a.
Year
Net cash flow = NCF
0
-$2,650,000.00
Y
NCF = (CF-D)x(1-Tax rate)+D+WC
1
$1,024,900.00
2
$1,024,900.00
3
$1,548,200.00
b.
NPV = $291,937.64
Working:
Year
Cash flows = CF
Depreciation = D = 2340000/3
Working capital adjustment = WC
Net cash flow = NCF
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-$2,340,000.00
$0.00
-$310,000.00
-$2,650,000.00
1.00000
-$2,650,000.00
Y
CF
D
WC
NCF = (CF-D)x(1-Tax rate)+D+WC
Df = 1/(1+Rate%)^Y
=Df x NCF
1
$1,090,000.00
$780,000.00
$1,024,900.00
0.90909
$931,727.27
2
$1,090,000.00
$780,000.00
$1,024,900.00
0.82645
$847,024.79
3
$1,360,000.00
$780,000.00
$310,000.00
$1,548,200.00
0.75131
$1,163,185.57
Total = NPV =
$291,937.64
Note:
Year -1: CF =Sales-Cost = $1,090,000.00
Year -2: CF =Sales-Cost = $1,090,000.00
Year -2: CF =Sales-Cost+Market value of fixed asset = $1,360,000.00
Year
Net cash flow = NCF
0
-$2,650,000.00
Y
NCF = (CF-D)x(1-Tax rate)+D+WC
1
$1,024,900.00
2
$1,024,900.00
3
$1,548,200.00