Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.944 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 $151,200. The project requires an initial investment in net working capital of $216,000. The project is estimated to generate $1,728,000 in annual sales, with costs of $691,200. The tax rate is 22 percent and the required return on the project is 11 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

Statement showing NPV

Particulars	0	1	2	3	Total = NPV
Purchase cost of fixed asset	-1944000
WC Requirement	-216000
Sales		1728000	1728000	1728000
Cost		-691200	-691200	-691200
Depreciation (1944000/3)		-648000	-648000	-648000
PBT		388800	388800	388800
Tax @ 22%		-85536	-85536	-85536
PAT		303264	303264	303264
Add: Depreciation		648000	648000	648000
Annual cash flow		951264	951264	951264
Release of WC				216000
Salvage value of asset =151200 (1-tax rate) =151200 (1-22%) =151200 (0.78) = 117936				117936
Total cash flow	-2160000	951264	951264	1285200
PVIF @ 11%	1.0000	0.9009	0.8116	0.7312
PV	-2160000.00	856994.59	772067.20	939727.16	408788.96

Thus Project's Year 0 net cash flow = -21,60,000 $

Project's Year 1 net cash flow = 951264 $

Project's Year 2 net cash flow = 951264 $

Project's Year 3 net cash flow = 1285200 $

NPV of project = $ 408788.96