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 $1,735,000 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? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)

b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Year 0 cash flow, Year 1 cash flow, Year 2 cash flow, Year 3 cash flow b. NPV

Answer 1

Cash flow in year 0 = -$2,570,000.00 (note this figure is negative, because it is cash outflow)
Cash flow in year 1 = $838,722.24
Cash flow in year 2 = $1,042,529.60
Cash flow in year 3 =  $927,589.20

	Year 0	Year 1	Year 2	Year 3
Annual Sales	-	1,735,000.00	1,735,000.00	1,735,000.00
Less: Costs	-	650,000.00	650,000.00	650,000.00
Income before Depreciation	-	1,085,000.00	1,085,000.00	1,085,000.00
Depreciation	-	773,256.00	1,031,240.00	343,592.00
Income before tax	-	311,744.00	53,760.00	741,408.00
Tax at 21%	-	65,466.24	11,289.60	155,695.68
Add back depreciation	-	773,256.00	1,031,240.00	343,592.00
Cash flow from operations	-	838,722.24	1,042,529.60	499,287.68
Initial Investment	(2,320,000.00)	-	-	-
Working Capital	(250,000.00)	-	-	250,000.00
Cash flow from sale of asset	-	-	-	178,301.52
Total Cash Flow	(2,570,000.00)	838,722.24	1,042,529.60	927,589.20
Discount Factor at 12%	1.00	0.892857143	0.797193878	0.711780248
Discounted Cash flow	(2,570,001.00)	838,721.35	1,042,528.80	927,588.49
NPV =	238,837.64

Calculation of after tax cash flow from sale of asset
Sale price or market price	180,000.00
Less: Book Value	171,912.00
(Asset price * 7.41%)
Gain on sale	8,088.00
Tax on gain at 21%	1,698.48
After tax Cash Flow	178,301.52
(sale price - tax)

7.41% is MACRS percentage in 4th year.

3-year class MACRS = 33.33%, 44.45%, 14.81% and 7.41%

Excel Formulas:

Discount factor formula if not using excel:

Discount factor = 1/(1+i)^n

Where,
i = discount rate
n = number of periods.