Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.59 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $357,000. The project requires an initial investment in net working capital of $510,000. The project is estimated to generate $4,080,000 in annual sales, with costs of $1,632,000. The tax rate is 22 percent and the required return on the project is 10 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

Step 1 : Initial Investent

Particulars	Amount
Fixed Asset Cost	($4,590,000)
Net working Capital	($510,000)
Net Cashflow at year 0	($5,100,000)

Step 2 : Annual Cashflows

Particulars	Year1	Year 2	Year 3
Annual sales	4,080,000	4,080,000	4,080,000
Cost	1,632,000	1,632,000	1,632,000
Annual Inflow	2,448,000	2,448,000	2,448,000
Less : Depreciation(Note 1)	1,411,000	1,411,000	1,411,000
Annual Cashflow after depreciation	1,037,000	1,037,000	1,037,000
less : Tax @22%	228,140	228,140	228,140
Annual Cashflow after depreciation and tax	808,860	808,860	808,860
Add : Depreciation	1,411,000	1,411,000	1,411,000
Net Annual Cashflow	2,219,860	2,219,860	2,219,860
PVF = [1/(1+r)]n	0.909 [1/(1+.10)]1	0.8264[1/(1+.10)]2	0.7513[1/(1+.10)]3
PV of Cash flow	2017852.74	1834492.30	1667780.81

Note 1 : Depreciation= (Cost of fixed asset - Salvage Value) / No of years

Depreciation= ($4,590,000 - $357,000) / 3

Depreciation= ($4,233,000) / 3

Depreciation= 1,411,000

Step 3: Terminal Value

Particulars	Amount
Salvage Value of Fixed asset	$357,000
Working capital	$510,000
Total Terminal Vaule receivable at year 3	$867000
PVF	0.7513
PV of Terminal Value	$651377.1

Step 4 : NPV

NPV = Intital investment + PV of Cashflow at Year 1 + PV of Cashflow at Year 2 + PV of Cashflow at Year 3 + PV of Terminal Value

NPV = ($5,100,000) + $2017852.74 + $1834492.30 + 1667780.81+$651377.1

NPV = $1071502.95 ~ $1071503

Solution :

1. Year 0 Net Cash flow = ($5,100,000)

2.Year 1 Net Cash flow = $2219860 (PV = 2017852.74)

3.Year 2 Net Cash flow = $2219860 (PV = 1834492.30)

4.Year 3 Net Cash flow = $2219860 (PV = 1667780.81) + $867000 (PV = 651377.1)

5. NPV = $1071503