Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.134 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 $88,200. The project requires an initial investment in net working capital of $126,000. The project is estimated to generate $1,008,000 in annual sales, with costs of $403,200. The tax rate is 22 percent and the required return on the project is 13 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

	Year 0	Year 1	Year 2	Year 3
Annual sales	-	1,008,000	1,008,000	1,008,000
Less: Costs	-	403,200	403,200	403,200
Less: Depreciation	-	378,000	378,000	378,000
Earnings before tax	-	226,800	226,800	226,800
Less: Taxes at 22%	-	49,896	49,896	49,896
Net Income	-	176,904	176,904	176,904
Add back depreciation	-	378,000	378,000	378,000
Operating Cash flow	-	554,904	554,904	554,904
Investment in asset	-$1,134,000	-	-	68,796
Investment in Net working capital	-$126,000	-	-	126,000
Net Cash flow	-$1,260,000	554,904	554,904	749,700
NPV =	$185,216.42

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