Quad Enterprises is considering a new three year expansion project that requires
ID: 2812096 • Letter: Q
Question
Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its three year tax life. The project is estimated to generate $1,790,000 in annual sales, with the costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. A.) If the tax rate is 21 percent, what is the project’s Year 0 (zero) net cash flow? Year2? Year 3? B.) If the required return is 12 percent, what is the projects NPV?
Explanation / Answer
Workings
0 1 2 3 Fixed Asset Investment -2290000 Working Capital -410000 After tax Sales net Cost 861100 861100 861100 Tax Saving On Depreciation 160300 160300 160300 After Tax Salvage Value 331800 Working Capital Recaptured 410000 Net Cash Flow -2700000 1021400 1021400 1763200 PV factor 1 0.8929 0.7972 0.7118 Present Value -2700000 911,964.29 814,253.83 1,255,010.93 NPV 281,229.05