Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,780,000 in annual sales, with costs of $690,000. The project requires an initial investment in net working capital of $390,000, and the fixed asset will have a market value of $390,000 at the end of the project.

a.	If the tax rate is 24 percent, what is the project’s Year 0 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 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

D52 : x + C A B N 50 Year Revenue Costs 51 0 1 $1,780,000 $690,000 53 21 $1,780,000 $690,000 54 3 $1,780,000 $690,000 fx --K51/3 D E G H I J K L M Depreciati Net Depreciati After-tax Working Net cash PVIF@ on PBT Tax@24% income on OCF capital Investment flow 10% | $ (390,000) $(2,370,000) $(2,760,000)| 1.000| $ 790,000 $ 300,000 $ 72,000 $228,000 $790,000 $1,018,000 $ $ 1,018,000 0.909 $ 790,000 $ 300,000 $ 72,000 $228,000 $790,000 $1,018,000 $ - $ 1,018,000 0.826 $790,000 $ 300,000 $72,000 $228,000 $790,000 $1,018,000 $ 390,000 $ 296,400 $ 1,704,400 0.751 52 Present value -$2,760,000.00 $925,454.55 $841,322.31 $1,280,540.95 300,000 $ 72,000 $225,000 $790,000 $1,018,000 Net present value $287,317.81| $ 2,230,000 $2,230,000 $ 390,000 $ 390,000 $ 93,600 $ 296,400 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 24% After tax cash salvage value 69 70 Net cash flow Year O 71 Net cash flow Year 1 72 Net cash flow Year 2 73 Net cash flow Year 3 74 NPV -$2,760,000 $1,018,000 $1,018,000 $1,704,400 $287,317.81

Please rate thumbs up