Quad Enterprises is considering a new three-year expansion project that requires
ID: 2816821 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,120,000 in annual sales, with costs of $807,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project. If the tax rate is 30 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 12 percent, what is the project's NPV?
Three- Year MACRS
YEAR
Recovery Rate
1
33.33%
2
44.45%
3
14.81%
4
7.41%
PLEASE SHOW WORK
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.82 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,120,000 in annual sales, with costs of $807,000. The project requires an initial investment in net working capital of $340,000, and the fixed asset will have a market value of $230,000 at the end of the project. If the tax rate is 30 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 12 percent, what is the project's NPV?
Explanation / Answer
Calculation of OCF
Year 0 cash flow = - $2,820,000 - $340,000 = - $3,160,000
Book value at year end 3 = 2820000 - 939906 - 1253490 - 417642 = 208962
Profit on sale = 230000 - 208962 = 21038
After tax salvage value = 230000 - (21038 * 0.30) = 223689
Calculation of Net Cashflow
NPV = -$3160000 + $1072386 +$1032483 + $1144600 = +$89469
Year MACRS Depreciation 1 0.3333 939906 2 0.4445 1253490 3 0.1481 417642 4 0.0741 208962