Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,070,000 in annual sales, with costs of $765,000. The project requires an initial investment in net working capital of $290,000, and the fixed asset will have a market value of $265,000 at the end of the project. If the tax rate is 34 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)

  

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

If the required return is 13 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

Solution:

Cash flows at 0 period = investment in fixed asset + investment in working capital

Cash flows at 0 period = $26,70,000+$2,90,000=$29,60,000

Operating Cash flows at years1-3:

Particulars	Amount
Sales	20,70,000
Less: costs	7,65,000
Less: depreciation	8,90,000
Profit before tax	4,15,000
Less: Tax @34%	1,41,100
Profit after tax	2,73,900
Add: Depreciation	8,90,000
Operating cash flows	11,63,900

Other capital cash flows at year 3 = Net working capital + Market value of fixed asset (1-tax rate)

Other cash flows at year 3= $2,90,000+2,65,000(1-0.34)= $4,64,900

Cash flows at years 0-3

Years	Cash flow
0	($29,60,000)
1	$11,63,900
2	$11,63,900
3	$16,28,800

If the required rate of return is 13% then NPV ??

NPV= Present value of cash inflows - Present value of cash outflows

NPV = $11,63,900*0.8850+$11,63,900*0.7831+$16,28,800*0.6931-$29,60,000*1

NPV=$ 10,30,051.50+$9,11,450.09+$11,28,921.28-$29,60,000=$1,10,422.87