In: Finance
Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.292 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $411,600. The project requires an initial investment in net working capital of $588,000. The project is estimated to generate $4,704,000 in annual sales, with costs of $1,881,600. The tax rate is 24 percent and the required return on the project is 11 percent. |
What is the project's Year 0 net cash flow? |
What is the project's Year 1 net cash flow? |
What is the project's Year 2 net cash flow? |
What is the project's Year 3 net cash flow? |
What is the NPV? |
Initial Investment = $5,292,000
Useful Life = 3 years
Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $5,292,000 / 3
Annual Depreciation = $1,764,000
Initial Investment in NWC = $588,000
Salvage Value = $411,600
After-tax Salvage Value = $411,600 * (1 - 0.24)
After-tax Salvage Value = $312,816
Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Annual Operating Cash Flow = ($4,704,000 - $1,881,600) * (1 - 0.24)
+ 0.24 * $1,764,000
Annual Operating Cash Flow = $2,822,400 * 0.76 + 0.24 *
$1,764,000
Annual Operating Cash Flow = $2,568,384
Year 0:
Net Cash Flows = Initial Investment + Initial Investment in
NWC
Net Cash Flows = -$5,292,000 - $588,000
Net Cash Flows = -$5,880,000
Year 1:
Net Cash Flows = Operating Cash Flow
Net Cash Flows = $2,568,384
Year 2:
Net Cash Flows = Operating Cash Flow
Net Cash Flows = $2,568,384
Year 3:
Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax
Salvage Value
Net Cash Flows = $2,568,384 + $588,000 + $312,816
Net Cash Flows = $3,469,200
Required return = 11%
NPV = -$5,880,000 + $2,568,384/1.11 + $2,568,384/1.11^2 +
$3,469,200/1.11^3
NPV = $1,055,066.67