Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.41 mill

Question

3 years ago

7

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.41 mill

ion. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,775,000 in annual sales, with costs of $672,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project.
a. If the tax rate is 23 percent, what is the project’s Year 0 net cash flowYear 1, Year 2, Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)
b. If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)

Business

1 answer:

masha68 [24] · Answer 1 · 2022-10-06T18:57:26+03:00

Answer and Explanation:

The computation is shown below

Particulars 0 1 2 3

cost of project -$2,410,000

Investment in

working capital $-380,000

sales $1,775,000 $1,775,000 $1,775,000

less: cost -$672,000 -$672,000 -$672,000

less: depreciation -$2,410,000 $0 $0

operating profit -$1,307,000 $1,103,000 $1,103,000

less tax at 23% -$300,610 $253,690 $253,690

after tax profit -$1,006,390 $849,310 $849,310

add depreciation $2,410,000 $0 $0

after tax sale proceeds of machine $288,750

recovery of working capital $380,000

1. Net operating cash flow

-$2,790,000 $1,403,610 $849,310 $1,518,060

present value of net operating cash flow is

= net operating cash flow ÷ (1 + r)^n

r = 9%

-$2,790,000 $1,287,715.6 $714,847.235 $1,172,220.85

2 Net present value = sum of the present value of operating cash flow $384,783.69