Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.0 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $310,800 after 3 years. The project requires an initial investment in net working capital of $444,000. The project is estimated to generate $3,552,000 in annual sales, with costs of $1,420,800. The tax rate is 22 percent and the required return on the project is 9 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

Solution :-

Dep in Year 1 = $4,000,000 * 33.33% = $1,333,333.34

Dep in Year 2 = $4,000,000 * 44.45% = $1,778,000.00

Dep in Year 3 = $4,000,000 * 14.81% = $592,400

Book Value after 3 Years = $4,000,000 - [ $1,333,333 - $1,778,000 - $592,400 ] = $296,266.67

Salvage value after 3 Years = $310,800

Gain on Sale = $310,800 - $296,266.67 = $14,533.33

Tax on Gain on Sale = $14,533.33 * 0.22 = $3,197.33

After tax Salvage value = $310,800 -  $3,197.33 = $307,602.67

Cash flows

Year 0 = $4,444,000

Year 1 = $1,955,669.33

Year 2 = $2,053,496.00

Year 3 = $2,544,266.67

NPV = $1,043,219.24

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