Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.94 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 $462,000. The project requires an initial investment in net working capital of $660,000. The project is estimated to generate $5,280,000 in annual sales, with costs of $2,112,000. The tax rate is 23 percent and the required return on the project is 9 percent. What is the net cash flow in year 0? Year 1? year 2? and Year 3? What is the NPV?

  

Answer 1

a.	Net cash flow in year 0	$   66,00,000.00
Working:	Fixed Asset	$   59,40,000.00
	Net working capital	$     6,60,000.00
	Net cash flow in year 0	$   66,00,000.00
b.	Net cash flow in year 1	$   28,94,760.00
Working:
Straight line depreciation	=	(Cost - Salvage value)/Useful Life
	=	(5940000-0)/3
	=	$   19,80,000.00
Annual sales		$   52,80,000.00
Cost of sales		$ -21,12,000.00
Depreciation		$ -19,80,000.00
Profit before tax		$   11,88,000.00
Tax Expense		$    -2,73,240.00
Net Income		$     9,14,760.00
Depreciation		$   19,80,000.00
Operating cash flow		$   28,94,760.00
c.	Net cash flow in year 2	$   28,94,760.00
d.	Net cash flow in year 3	$   39,10,500.00
Working:
After tax sale of assets	=	Sales price *(1- tax Rate)
	=	462000*(1-0.23)
	=	$     3,55,740.00
Operating cash flow		$   28,94,760.00
After tax sale of assets		$     3,55,740.00
Working capital released		$     6,60,000.00
Net cash flow in year 3		$   39,10,500.00
e.	NPV	$   15,11,828.20
Working:
Year	Cash flow	Discount fatcor	Present Value
a	b	c=1.09^-a	d=b*c
0	$ -66,00,000.00	1.000	$ -66,00,000.00
1	$   28,94,760.00	0.917	$   26,55,743.12
2	$   28,94,760.00	0.842	$   24,36,461.58
3	$   39,10,500.00	0.772	$   30,19,623.50
NPV			$   15,11,828.20