Question

Fun With Finance is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.348 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 $260,400. The project requires an initial investment in net working capital of $372,000. The project is estimated to generate $2,976,000 in annual sales, with costs of $1,190,400. The tax rate is 32 percent and the required return on the project is 12 percent. Required:

(a) What is the project's year 0 net cash flow?

(b) What is the project's year 1 net cash flow?

(c) What is the project's year 2 net cash flow?

(d) What is the project's year 3 net cash flow?

(e) What is the NPV?

Answer 1

	Note 1
	Annual depreciation =	3348000/3	$     1,116,000
	year	0	1	2	3
	Initial investment	(3,348,000)
	Working capital	(372,000)			372,000
	Operating cash flow
	Contribution (2,976,000-1,190,400)	1,785,600	1,785,600	1,785,600
	depreciation		1,116,000.00	1,116,000.00	1,116,000.00
	Profit before tax		669,600.00	669,600.00	669,600.00
	Tax @ 32%		214,272.00	214,272.00	214,272.00
	Net income		455,328.00	455,328.00	455,328.00
	Operating cash flow		1,571,328.00	1,571,328.00	1,571,328.00
	Post tax salvage value
	(260400)*(1-32%)				177072
	Net cash flow	(3,720,000.00)	1,571,328.00	1,571,328.00	2,120,400.00	-
	PVIF @ 12%	1	0.892857143	0.797193878	0.711780248
	Present value	(3,720,000.00)	1,402,971.43	1,252,653.06	1,509,258.84	444,883.33
	NPV=	444,883.33