Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.7 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $285,600 after 3 years. The project requires an initial investment in net working capital of $408,000. The project is estimated to generate $3,264,000 in annual sales, with costs of $1,305,600. The tax rate is 24 percent and the required return on the project is 17 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

Initial Investment = $3,700,000
Useful Life = 3 years

Depreciation Year 1 = 33.33% * $3,700,000
Depreciation Year 1 = $1,233,210

Depreciation Year 2 = 44.45% * $3,700,000
Depreciation Year 2 = $1,644,650

Depreciation Year 3 = 14.81% * $3,700,000
Depreciation Year 3 = $547,970

Book Value at the end of Year 3 = $3,700,000 - $1,233,210 - $1,644,650 - $547,970
Book Value at the end of Year 3 = $274,170

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $285,600 - ($285,600 - $274,170) * 0.24
After-tax Salvage Value = $282,856.80

Initial Investment in NWC = $408,000

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$3,700,000 - $408,000
Net Cash Flows = -$4,108,000

Year 1:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($3,264,000 - $1,305,600) * (1 - 0.24) + 0.24 * $1,233,210
Operating Cash Flow = $1,784,354.40

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,784,354.40

Year 2:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($3,264,000 - $1,305,600) * (1 - 0.24) + 0.24 * $1,644,650
Operating Cash Flow = $1,883,100

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,883,100

Year 3:

Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Operating Cash Flow = ($3,264,000 - $1,305,600) * (1 - 0.24) + 0.24 * $547,970
Operating Cash Flow = $1,619,896.80

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $1,619,896.80 + $408,000 + $282,856.80
Net Cash Flows = $2,310,753.60

Required Return = 17%

NPV = -$4,108,000 + $1,784,354.40/1.17 + $1,883,100/1.17^2 + $2,310,753.60/1.17^3
NPV = $235,485.80