Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 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 $2,160,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project. If the tax rate is 34 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	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 10 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

	Year 0	Year 1	Year 2	Year 3
Annual Sales	-	2,160,000	2,160,000	2,160,000
Less: Costs	-	855,000	855,000	855,000
Less: Depreciation	-	980,000	980,000	980,000
Operating Profit	-	325,000	325,000	325,000
Less: Tax at 34%	-	110,500	110,500	110,500
Net income	-	214,500	214,500	214,500
Add back Depreciation	-	980,000	980,000	980,000
Cash flow from operations	-	1,194,500	1,194,500	1,194,500
Initial Investement	-$2,940,000	-	-	-
Investment in Net Working Capital	-$380,000	-	-	380,000
After tax salvage value of assets	-	-	-	165,000
Net Cash flow	-$3,320,000	1,194,500	1,194,500	1,739,500
NPV =	$60,011.27

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