Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.2 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $172,200 after 3 years. The project requires an initial investment in net working capital of $246,000. The project is estimated to generate $1,968,000 in annual sales, with costs of $787,200. The tax rate is 22 percent and the required return on the project is 13 percent.

    

What is the project's year 0 net cash flow?

   

What is the project's year 1 net cash flow?

  

What is the project's year 2 net cash flow?

  

What is the project's year 3 net cash flow?

  

What is the NPV?

Answer 1

Initial Investment = $2,200,000
Useful Life = 3 years

Depreciation Year 1 = 33.33% * $2,200,000
Depreciation Year 1 = $733,260

Depreciation Year 2 = 44.45% * $2,200,000
Depreciation Year 2 = $977,900

Depreciation Year 3 = 14.81% * $2,200,000
Depreciation Year 3 = $325,820

Book Value at the end of Year 3 = $2,200,000 - $733,260 - $977,900 - $325,820
Book Value at the end of Year 3 = $163,020

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $172,200 - ($172,200 - $163,020) * 0.22
After-tax Salvage Value = $170,180.40

Initial Investment in NWC = $246,000

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$2,200,000 - $246,000
Net Cash Flows = -$2,446,000

Year 1:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,968,000 - $787,200) * (1 - 0.22) + 0.22 * $733,260
Operating Cash Flow = $1,082,341.20

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,082,341.20

Year 2:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,968,000 - $787,200) * (1 - 0.22) + 0.22 * $977,900
Operating Cash Flow = $1,136,162

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,136,162

Year 3:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($1,968,000 - $787,200) * (1 - 0.22) + 0.22 * $325,820
Operating Cash Flow = $992,704.40

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $992,704.40 + $246,000 + $170,180.40
Net Cash Flows = $1,408,884.80

Required Return = 13%

NPV = -$2,446,000 + $1,082,341.20/1.13 + $1,136,162/1.13^2 + $1,408,884.80/1.13^3
NPV = $378,033.41