Question

Problem 10-11 Calculating Project Cash Flow from Assets [LO1] Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight- line to zero over its three-year tax life. The project is estimated to generate $1,725,000 in annual sales, with costs of $635,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, what is the project's Year O 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 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) $ 2,590,000 Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

2 after tax salvage value:(plant) salvage value of plant book value on date of sale p rofit on sale less: less: $225,000.00 $0.00 $225,000.00 1 $1,725,000.00 $635,000.00 $770,000.00 $320,000.00 $73,600.00 $246,400.00 $770,000.00 $1,016,400.00 $1,725,000.00 $635,000.00 $770,000.00 $320,000.00 $73,600.00 $246,400.00 $770,000.00 $1,016,400.00 3 $1,725,000.00 $635,000.00 $770,000.00 $320,000.00 $73,600.00 $246,400.00 $770,000.00 $1,016,400.00 less: salvage value less: tax on gain after tax salvage value $225,000.00 $51,750.00 $173,250.00 add: $280,000.00 YEAR annual sales costs depreciation EBT tax @ 23% EAT depreciation OCF initial investment: plant $2,310,000 working capital - $280,000 after tax salvage value: plant Cash flows -$2,590,000.00 pv @ 11% 1 PRESENT VALUE -$2,590,000.00 NPV $225, 204.13 Cash flows year 0 -$2,590,000.00 year 1 $1,016,400.00 year 2 $1,016,400.00 year 3 $1,469,650.00 NPV $225,204.13 $1,016,400.00 0.90090 $915,675.68 $1,016,400.00 0.81162 $824,933.04 $173,250.00 $1,469,650.00 0.73119 $1,074,595.41