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 $2.28 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,750,000 in annual sales, with costs of $660,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $300,000 at the end of the project. a. If the tax rate is 23 percent, what is the project's Year O 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 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places,e.g., 32.16.) a. Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Explanation / Answer

Detailed solution and explanation

(a) Year - 0 ....... is cash outlay. Hence we indicate with minus sign. Amount of cash out flow will be Investment of 2280,000 + working capital investment of 330,000 = - 2610,000

(b) Year - 1 , Year - 2 and Year - 3 cash flows are computed as under

Question - b CALCULATION OF NPV

a Year 0 cash flow -2610000 Year 1 cash flow 1014100 Year 2 cash flow 1014100 Year 3 cash flow 1575100 b NPV 225005.81

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