Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 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 $1.735 million in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent. a. What is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. 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 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Year 0 Year 1 Year 2 Year 3 NPV $ $ $ $ $ 1,019,500 1,019,500 1,019,500 128,787.07

Answer 1

	0	1	2	3
Investment	-2,320,000
NWC	-250,000			250,000
Salvage				180,000
Sales		1,735,000	1,735,000	1,735,000
Costs		-650,000	-650,000	-650,000
Depreciation		-773,333	-773,333	-773,333
EBT		311,667	311,667	311,667
Tax (21%)		-65,450	-65,450	-65,450
Net Income		246,217	246,217	246,217
Cash Flows	-2,570,000	1,019,550	1,019,550	1,411,750
NPV	$157,947.28

Cash Flows = Investment + NWC + Salvage x (1 - tax) + Net Income + Depreciation