Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.27 million. The fixed asset falls into the three-year MACRS class

	year-3	year-5	year-7
1	33.33%	20.00%	14.29%
2	44.45	32	24.49
3	14.81	19.2	17.49
4	7.41	11.52	8.93
5		11.52	8.93
6		5.76	8.92
7			8.93
8			4.46

. The project is estimated to generate 1.8 million in annual sales, with costs of $692k. The project requires an initial investment in net working capital of 430,000, and the fixed asset will have a market value of 450,000 at the end of the project.

a. If the tax rate is 23%, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3?

b. If the required return is 10%, What is the project's NPV?

Answer 1

	Note - 1 : cash out flow in year -0
	Initial investment =		-2270000
	Working capital =		-430,000
	outflow in year 0 =		-2700000
	Note -2
	Depreciation schedule for 3 year based on MACRS depreciation rates-
	Year	Rate	Depreciation	Accumulated Depreciation	Book Value
	0		$0.00	$0.00	$2,270,000.00
	1	33.33%	$756,591	$756,591	$1,513,409
	2	44.45%	$1,009,015	$1,765,606	$504,394
	3	14.81%	$336,187	$2,101,793	$168,207
	Note -3
	Operating cash flow from year 1 to year 4
			year -1	year -2	year -3
	Sales		1800000.00	1800000.00	1800000.00
	Less Expesnes		-692000.00	-692000.00	-692000.00
	Less : Depreciation		-756591.00	-1765606.00	-2101793.00
	Profit before tax		351409.00	-657606.00	-993793.00
	Tax @ 23%		80824.07	-151249.38	-228572.39
	Profit after tax		270584.93	-506356.62	-765220.61
	Add back depreciation		756591.00	1765606.00	2101793.00
	Operating cash flow		1027175.93	1259249.38	1336572.39
	Note -4
	Computation of post tax salvage value of asset
	Book value of asset at year 3 =			$168,207
	sales price / Market value =			450000
	gain on asset =			$281,793
	Tax on gain @23%			$64,812.39
	Post tax salvage value =			$385,187.61
	Answer a.
	what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3?
	Particular		Year-0	Year-1	Year-2	Year-3
i	Investment		-2700000
ii	Operating cash flow			1027175.93	1259249.38	1336572.39
iii	Post tax salvage value					$385,187.61
iv	Working capital release					430,000
v=i+ii+iii+iv	Net cash flow		-2700000	1027175.93	1259249.38	2151760
	Answer b.
	Computation of NPV
	Particular		Year-0	Year-1	Year-2	Year-3
i	Net cash flow		-2700000	1027175.93	1259249.38	2151760
ii	PVIF @ 10%		1	0.909090909	0.826446281	0.7513148
iii=i*ii	present value		-2700000	933796.3	1040701.967	1616649.14	891147.4
	NPV =		891147.4029