Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $215,000 at the end of the project. If the tax rate is 30 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)

  

Years	Cash Flow
Year 0	$ -3040000
Year 1	$   1186500
Year 2	$   1186500
Year 3	$ ?

If the required return is 13 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV

$ ?

Answer 1

Solution :

The Project Cash Flows 's Year wise are

Year 0 = - Initial Investment - Initial Net Working Capital Introduced = - $ 2,730,000 - $ 310,000 = - $ 3,040,000

Year 1 = Net Cash Inflow = $ 1,186,500

Year 2 = Net Cash Inflow = $ 1,186,500

Year 3 = Net Cash Inflow + Initial Net Working Capital Investment Recouped + Post Tax Salvage value or Market Value

= $ 1,186,500 + $ 310,000 + $ 150,500 = $ 1,647,000

If the required return is 13 percent, the project's NPV is = $ 80,657.16

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.