Answer:
See the explanation below
Explanation:
1. If the tax rate is 24 percent, what is the project’s Year 0 net cash flow?
A. Year 1.
B. Year 2.
C. Year 3
Year 0 cash flow = - initial fixed asset investment - initial investment in net working capital = $2,180,000 + $290,000 = $2,470,000
Annual depreciation expenses = 2,470,000 / 3 = $823,333
A. Year 1 cash flow = (Sales - costs - depreciation)(1 - tax) + depreciation = (1,730,000 - 636,000 - 823,333)(1 - 0.24) + 823,333 = $1,029,039.92
B. Year 2 cash flow = $1,029,039.92
C. Non operating year 3 cash flow = Market value + Net working capital - tax(market value - book value) = 240,000 + 290,000 - 0.24(240,000 - 0) = $472,400
Year 3 cash flow = $472,400 + $1,029,039.92 = $1,501,439.92
2. If the required return is 12 percent, what is the project's NPV?
NPV = -2,470,000 + (1,029,039.92 / (1 + 0.12)^1 + 1,029,039.92 / (1 + 0.12)^2 + 1,501,439.92 / (1 + 0.12)^3 = $337,825.25
