Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,110,000 in annual sales, with costs of $799,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project.

  

If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)

Years	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 12 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

year o investment in capital and working capital requirements

= $2790000 + 3,30,000

= $3120000

year 1 cash flows

( sales - costs ) ( 1 - tax rate ) + depreciation tax shield

depreciation for year 1 = 0.3333* 2790000

depreciation tax shield = 0.35 *929907

( 2,110,000 - 799000 ) ( 1- 0.35 ) + 325467.45

= 852150 + 325467.45

=$11,77,617.45

year 2 = $852150 + 434054.25 ( 0.4445* 2790000* 0.35)

= $1286204.25

year 3 = 852150 + 144619.65 ( 0.1481* 2790000*0.35)

=996769.65

BV AT YEAR 3 IS = 206739

after tax salvage value = market value of assets - ( MV - BV ) TAX RATE

= 225000 - ( 225000 - 206739 )0.35

= 218608.65

(SALES- COSTS )( 1- TAX RATE ) + DEPRECIATION TAX SHIELD + AFTER TAX SALVAGE VALUE RECOVERY OF WORKING CAPITAL

TOTAL CASH FLOW IN YEAR 3 = 996769.65 + 218608.65 + 3,30,000 = 1545378.3

YEAR 0 =$ 3,12,0000

YEAR 1 = $11,77,617.45

YEAR 2 = $12,86,204.75

YEAR 3 = $1545378.3

THE NPV GIVEN THE REQUIRED RETURN OF 12 % IS $ 56768.4