Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1.735 million in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent.

a. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

Question a:

Project's Year 0 net cash flow is -$2,570,000

Project's Year 1 net cash flow is $1,019,533.76

Project's Year 2 net cash flow is $1,073,710.40

Project's Year 3 net cash flow is $1,357,605.84

Question b:

Calculation of Project's NPV
Particulars	0	1	2	3
Initial Investment
Investment in fixed asset	-2320000
Investment in net working capital	-250000
Net Investment (A)	-2570000
Operating Cash Flows
Annual Sales (B)		1735000	1735000	1735000
Variable Costs (C )		650000	650000	650000
Depreciation (D) $2,320,000 * 33.33%, 44.45%, 14.81%		773256	1031240	343592
Profit before tax (E = B-C-D)		311744	53760	741408
Tax @21% (F = E*21%)		65466.24	11289.6	155695.68
Profit After Tax (G = E-F)		246277.76	42470.4	585712.32
Add back Depreciation (H = D)		773256	1031240	343592
Operating Cash Flows (I = G+H)		1019533.76	1073710.4	929304.32
Terminal Value
Sale Value (J)				180000
Book value of asset (K) $2,320,000 * 7.41%				171912
Profit on sale (L = J-K)				8088
Tax on sale (M = L*21%)				1698.48
After tax sale value (N = J-M)				178301.52
Recovery of net working capital (O)				250000
Net Terminal value (P = N+O)				428301.52
Total Cash Flows (Q = A+I+O)	-2570000	1019533.76	1073710.4	1357605.84
Discount Factor @12% (R ) 1/(1+12%)^n n=0,1,2,3	1	0.892857143	0.797193878	0.711780248
Discounted Cash Flows (S = Q*R)	-2570000	910298	855955.3571	966317.0212
NPV of the Project	162570.3784

Therefore, NPV of the project is $162,570.38