Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.778 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $449,400. The project requires an initial investment in net working capital of $642,000. The project is estimated to generate $5,136,000 in annual sales, with costs of $2,054,400. The tax rate is 24 percent and the required return on the project is 11 percent. What is the project's Year 0 net cash flow?
What is the project's Year 1 net cash flow?
What is the project's Year 2 net cash flow?
What is the project's Year 3 net cash flow?
What is the NPV?
| Year 0 cash flow = -5,778,000-642000 | |||
| -6420000 | |||
| Year 1 | Year 2 | Year 3 | |
| Annual Sales | 5,136,000 | 5,136,000 | 5,136,000 |
| Costs | 2,054,400 | 2,054,400 | 2,054,400 |
| Depreciation | 1,926,000 | 1,926,000 | 1,926,000 |
| Income before tax | 1,155,600 | 1,155,600 | 1,155,600 |
| Less: Tax | 277,344 | 277,344 | 277,344 |
| Net Income | 878,256 | 878,256 | 878,256 |
| Add: Depreciation | 1,926,000 | 1,926,000 | 1,926,000 |
| Operating cash flow | 2,804,256 | 2,804,256 | 2,804,256 |
| Working capital release | 642,000 | ||
| Salvage value after tax | 341,544 | ||
| Cash flow | 2,804,256 | 2,804,256 | 3,787,800 |
| NPV = Present value of cash inflows - Present value of cash outflows | |||
| 1,151,960.55 | |||
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