Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.49 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,010,000 in annual sales, with costs of $705,000. The project requires an initial investment in net working capital of $230,000, and the fixed asset will have a market value of $295,000 at the end of the project. If the tax rate is 34 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)

  

Years	Cash Flow
Year 0	$
Year 1	$
Year 2	$
Year 3	$

If the required return is 16 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

Solution : NPV of the project is $ 120,262.

Calculation and Explanation:

1) Below is the Table showing project’s cashflows for Year 0 ,net cash flow Year 1,Year 2 &Year 3

	Workings	0	1	2	3
Initial Investment (Fixed Assets + Increase in Working Capital)	2,490,000 + 230,000	-2,720,000
Cash flows	Refer Table Below		1,143,500	1,143,500	1,568,200

Working Note: Table showing calculation of cash Inflow

	Working	Year 1	Year 2	Year 3
Annual Sales	Given	2,010,000	2,010,000	2,010,000
Costs	Given	(705,000)	(705,000)	(705,000)
Depreciation	=2,490,000 / 3	(830,000)	(830,000)	(830,000)
Earning Before Taxes	(Sales-Cost-Depreciation)	475,000	475,000	475,000
Taxes	Earnings before Taxes * 0.34	(161,500)	(161,500)	(161,500)
Earnings After Tax	Earnings before tax - Taxes	313,500	313,500	313,500
Depreciation Added	Non cash Item	830,000	830,000	830,000
Salvage Value	Given in year 3	-	-	295,000
Taxes on Gain on sale of Equipment	[(Book Value-Salvage value) * Tax rate] i.e ( 0 - 295000) * 0.34			(100,300)
Release of Working Capital	Assumed will be released at the end of project life			230000
Cash Flows		1,143,500	1,143,500	1,568,200

2) Calulation of NPV

Year	Cash Flows	Discounting Rate @ 16 %	Discounted Cashflows
1	1,143,500	0.86206896551	985,775.86206
2	1,143,500	0.7431629013	849,806.777636
3	1,568,200	0.64065767353	1,004,679.36362

Present Value of Cash Inflow	2,840,262.00331
(-)Present Value of Cash Outflow	(2,720,000)
Net Present Value	$120,262.00331