Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,720,000 in annual sales, with costs of $628,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $210,000 at the end of the project.

  

a.	If the tax rate is 22 percent, what is the project’s Year 0 net cash flow? Year 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 10 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.)

Answer 1

Year 0 investment= Initial Investment+working capital investment=2300000+270000=$2570000

First Year Depreciation expense=$2.3mn

Year	Revenue	Cost	Salvage Value	Depreciation expense	Profit after Depreciation(Revenue-Cost+salavage value-Depreciation)	Tax (Profit after Depreciation*22%)	Cash Flow(Profit after depreciation-tax+depreciation)	Present Value of cash flow (Cash Flow/(1+required rate)^year)
-	(2,570,000)	-	-	-	(2,570,000)	-	(2,570,000)	(2,570,000)
1	1,720,000	628,000	-	2,300,000	(1,208,000)	-	1,092,000	992,727
2	1,720,000	628,000	-	-	1,092,000	240,240	851,760	703,934
3	1,720,000	628,000	210,000	-	1,302,000	286,440	1,015,560	763,005
							NPV(Total present value)	(110,334)

a) Cash flow for year 0,1,2& 3 are $-2570000,$1092000,$851760,$1015560 respectively and NPV is $-110334.58