Question

***Please Explain how to get these answers without using excel****

Quad Enterprises is considering a new 3 year expansion project that requires an initial fixed asset investment of $2.592 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 $201,600. The project requires an initial investment in net working capital of $288,000. The project is estimated to generate $2,304,000 in annual sales, with costs of $921,600. The tax rate is 23 percent and the required return on the project is 10 percent.

1) What is the projects Year 0 net cash flow?

A. $ -2,880,000

2) What is the projects Year 1 net cash flow?

A. $1,263,168

3) What is the projects Year 2 net cash flow?

A. $1,263,168

4) What is the projects Year 3 net cash flow?

A. $1,706,400

5) What is the NPV?

A. $594,319

Answer 1

Project’s Year 0, Year 1, Year 2 and Year 3 Cash Flow

Years	Cash Flow
Year 0	-$2,880,000
Year 1	$1,263,168
Year 2	$1,263,168
Year 3	$1,706,400

Calculate of Annual Cash Flow

Particulars	Amount ($)
Annual Sales	2,304,000
Less: Costs	921,600
Less: Depreciation [$2,592,000 / 3 Years]	864,000
Net Income Before Tax	518,400
Less: Tax at 23%	119,232
Net Income After Tax	399,168
Add Back: Depreciation	864,000
Annual Cash Flow	1,263,168

Year 0 Cash outflow

Year 0 Cash outflow = Initial Investment + Working Capital

= -$2,592,000 - $288,000

= -$2,880,000

Year 1 Cash Flow = $1,263,168

Year 2 Cash Flow = $1,263,168

Year 3 Cash Flow

Year 3 Cash Flow = Annual cash flow + Working capital + After-tax market value

= $1,263,168 + $288,000 + [$201,600 x (1 – 0.23)]

= $1,263,168 + $288,000 + [$201,600 x 0.77]

= $1,263,168 + $288,000 + $155,232

= $1,706,400

Net Present Value (NPV) of the Project

Period	Annual Cash Flow ($)	Present Value factor at 10.00%	Present Value of Cash Flow ($)
1	12,63,168	0.9090909	11,48,335
2	12,63,168	0.8264463	10,43,940
3	17,06,400	0.7513148	12,82,044
TOTAL			34,74,319

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $34,74,319 - $2,880,000

= $594,319

“Hence, the Net Present Value (NPV) will be $594,319”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.