Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.97 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,170,000 in annual sales, with costs of $847,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $255,000 at the end of the project.

  

If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)

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

If the required return is 9 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV

$

PLEASE SHOW WORK, NO EXCEL PLEASE

Answer 1

Initial investment outlay = cost of asset+working capital = 2970000+390000=3360000

operating cash flows = (sales-cost-MACR rate*cost of asset )*(1-tax rate)+depreciation

for eg:

year 1 = (2170000-1323000-0.3333*2970000)*(1-0.35)+0.3333*2970000 = 1206415.4

terminal cash flow = salvage value*tax rate+reversal of working capital+selling price*(1-tax rate)

=220077*0.35+390000+255000*(1-0.35) = 632776.95

where salvage value = cost of asset-cumulative depreciation over 3 years

Time line		0	1	2	3
Cost of new machine		-2970000
Initial working capital		-390000
=Initial Investment outlay		-3360000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.0000%
Sales			2170000	2170000	2170000
Profits	Sales-variable cost		1323000	1323000	1323000
-Depreciation	=Cost of machine*MACR%		-989901	-1320165	-439857	220077	=Salvage Value
=Pretax cash flows			333099	2835	883143
-taxes	=(Pretax cash flows)*(1-tax)		216514.35	1842.75	574042.95
+Depreciation			989901	1320165	439857
=after tax operating cash flow			1206415.4	1322007.75	1013900
reversal of working capital					390000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				165750
+Tax shield on salvage book value	=Salvage value * tax rate				77026.95
=Terminal year after tax cash flows					632776.95
Total Cash flow for the period		-3360000	1206415.4	1322007.75	1646676.9
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029
Discounted CF=	Cashflow/discount factor	-3360000	1106803.1	1112707.47	1271536.7
NPV=	Sum of discounted CF=	131047.247

I hope this is well explained