Question

7A) Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 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 $2,190,000 in annual sales, with costs of $815,000. If the tax rate is 35 percent, what is the OCF for this project? Suppose the required return on the project is 12 percent. What is the project's NPV?
7B) In the previous problem, suppose the project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?
7C) Suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project's Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?

Please include ALL Excel formulas in your answer. Shortened version please.

Answer 1

7A)	Annual sales	$      21,90,000
	Costs	$        8,15,000
	Depreciation (2900000/3)	$        9,66,667
	NOI	$        4,08,333
	Tax at 35%	$        1,42,917
	NOPAT	$        2,65,417
	Add: Depreciation	$        9,66,667
	OCF	$      12,32,083
	NPV = -2900000+1232083*(1.12^3-1)/(0.12*1.12^3) =	$            59,255
7B)		0	1	2	3
	Annual sales		$21,90,000	$ 21,90,000	$21,90,000
	Costs		$   8,15,000	$    8,15,000	$   8,15,000
	Depreciation (2900000/3)		$   9,66,667	$    9,66,667	$   9,66,667
	NOI		$   4,08,333	$    4,08,333	$   4,08,333
	Tax at 35%		$   1,42,917	$    1,42,917	$   1,42,917
	NOPAT		$   2,65,417	$    2,65,417	$   2,65,417
	Add: Depreciation		$   9,66,667	$    9,66,667	$   9,66,667
	OCF		$12,32,083	$ 12,32,083	$12,32,083
	Capital expenditure	$      29,00,000			$ -1,36,500	[210000*(1-35%)]
	Change in NWC	$        3,00,000			$ -3,00,000
	Project cash flows	$    -32,00,000	$12,32,083	$ 12,32,083	$15,32,083
	PVIF at 12%	1	0.89285714	0.797193878	0.71178025
	PV at 12%	$    -32,00,000	$11,00,074	$    9,82,209	$10,90,507
	NPV	$          -27,210
7C)	Annual sales		$21,90,000	$ 21,90,000	$21,90,000
	Costs		$   8,15,000	$    8,15,000	$   8,15,000
	Depreciation MACRS year rate		33.33%	44.45%	14.81%	7.41%
	Depreciation		$   9,66,570	$ 12,89,050	$   4,29,490	$              2,14,890
	NOI		$   4,08,430	$        85,950	$   9,45,510
	Tax at 35%		$   1,42,951	$        30,083	$   3,30,929
	NOPAT		$   2,65,480	$        55,868	$   6,14,582
	Add: Depreciation		$   9,66,570	$ 12,89,050	$   4,29,490
	OCF		$12,32,050	$ 13,44,918	$10,44,072
	Capital expenditure	$      29,00,000			$ -2,11,712	[210000-(210000-214890)*35%)]
	Change in NWC	$        3,00,000			$ -3,00,000
	Project cash flows	$    -32,00,000	$12,32,050	$ 13,44,918	$13,44,072
	PVIF at 12%	1	0.89285714	0.797193878	0.71178025
	PV at 12%	$    -32,00,000	$11,00,044	$ 10,72,160	$   9,56,684
	NPV	$          -71,112