Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,140,000 in annual sales, with costs of $823,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $240,000 at the end of the project. If the tax rate is 35 percent, what is the projects Year 0 net cash flow? Year 1? Year 2? Year 3?
Years Cash Flow
Year 0 $
Year 1 $
Year 2 $
Year 3 $

If the required return is 10 percent, what is the project's NPV?

Answer 1

Answer:

Years            Cash Flow

Year 0           -$ 3,240,000

Year 1            $ 1,192,050

Year 2           $ 1,304,106

Year 3           $ 1,595,994

If the required return is 10 percent, what is the project's NPV?

using a financial calculator, NPV = $120,549.29

Explanation:

cash flow year 0 = $2,880,000 + $360,000 = $3,240,000

MACRS depreciation

33.33% x $2,880,000 = $960,000

44.45% x $2,880,000 = $1,280,160

14.81% x $2,880,000 = $399,840 (since salvage value is $240,000)

cash flow year 1 = [($2,140,00 - $823,000 - $960,000) x 0.65] + $960,000 = $1,192,050

cash flow year 2 = [($2,140,00 - $823,000 - $1,280,160) x 0.65] + $1,280,160 = $1,304,106

cash flow year 3 = [($2,140,00 - $823,000 - $399,840) x 0.65] + $399,840 + $240,000 + $360,000 = $1,595,994