Quad Enterprises is considering a new three-year expansion project that requires
ID: 2819270 • Letter: Q
Question
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,070,000 in annual sales, with costs of $765,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project. If the tax rate is 34 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.)
If the required return is 13 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.)
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,070,000 in annual sales, with costs of $765,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project. If the tax rate is 34 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.)
Explanation / Answer
Solution:
Cash flows at 0 period = investment in fixed asset + investment in working capital
Cash flows at 0 period = $26,70,000+$2,90,000=$29,60,000
Operating Cash flows at years1-3:
7,65,000
Other capital cash flows at year 3 = Net working capital + Market value of fixed asset (1-tax rate)
Other cash flows at year 3= $2,90,000+2,65,000(1-0.34)= $4,64,900
Cash flows at years 0-3
If the required rate of return is 13% then NPV ??
NPV= Present value of cash inflows - Present value of cash outflows
NPV = $11,63,900*0.8850+$11,63,900*0.7831+$16,28,800*0.6931-$29,60,000*1
NPV=$ 10,30,051.50+$9,11,450.09+$11,28,921.28-$29,60,000=$1,10,422.87
Particulars Amount Sales 20,70,000 Less: costs7,65,000
Less: depreciation 8,90,000 Profit before tax 4,15,000 Less: Tax @34% 1,41,100 Profit after tax 2,73,900 Add: Depreciation 8,90,000 Operating cash flows 11,63,900