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

Annual cash flow pre tax=1735000-650000 = 1085000

The OCF is as follows (Refer Image for formulae)

Year	Depreciation rate	OCF		MACRS 3 year
1	33.33%	Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
2	44.45%	1	1085000	-773256	311744	-65466.24	246277.76	1019533.76
3	14.81%	2	1085000	-1031240	53760	-11289.6	42470.4	1073710.4
		3	1085000	-343592	741408	-155695.68	585712.32	929304.32

Salvage of equipment (Refer Image for formulae)

Salvage
Purchase price	2320000
Less: Depreciation	-2148088
Closing book value	171912
Selling price	180000
Gain/(loss)	8088
Tax/ Saving	-1698.48
Net salvage	178301.52

Hence the Net cash flows are as follows

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-2320000		-250000		-2570000
1		$1,019,533.76			1019533.76
2		$1,073,710.40			1073710.4
3		$929,304.32	250000	178301.52	1357605.84

a: Year 0 CF = -2570,000

Year 1 CF = 1019533.76

Year 2 CF = 1073710.4

Year 3 CF = 1357605.84

b: NPV = 162,570.38 (Refer Image)

WORKINGS