Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,805,000 in annual sales, with costs of $715,000. The project requires an initial investment in net working capital of $440,000, and the fixed asset will have a market value of $465,000 at the end of the project.

a.	If the tax rate is 24 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
b.	If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32

Answer 1

(a) Project's cashflows:

Year 0 - 28,20,000

Year 1 10,18,800

Year 2 10,18,800

Year 3 18,12,200

(b) NPV of the project = Present Value of Cash inflows - Initial Investment = 30,69,783.79 - 28,20,000 = 249,783.79

Workings:

1) After tax salvage value = 465,000(1- 0.24) = 353,400

2) Depreciation = 23,80,000/3 = 793,333.33