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 falls into the three-year MACRS class (MACRS schedule). 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. If the required return is 12 percent, what is the project's NPV? (Do not round Intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) $ 2,570,000.00 Year 0 Year 1 Year 2 Year 3 NPV

Answer 1

rate positively ..

	Computation of depreciation =
	Total cost = 2320000		2320000
	year	1	2	3
	Depreciation rate	33.33%	44.45%	14.81%
	Depreciation amt	773,256	1,031,240	343,592
	book value at year -3 end	171,912
	Computation of NPV
	year	0	1	2	3
a	initial investment	(2,320,000)
b	Working capital	(250,000)
A	Initial investment	(2,570,000)
	operating cash flow
i	Annual saving = 1735000-650000		1,085,000	1,085,000	1,085,000
ii	Depreciation rate		33.33%	44.45%	14.81%
iii	depreciation		773,256	1,031,240	343,592
iv=i-iii	Profit before tax		311,744	53,760	741,408
v=iv*21%	Tax@ 21%		65,466	11,290	155,696
vi=iv-v	Profit after tax		246,278	42,470	585,712
B=vi+iii	operating cash flow		1,019,534	1,073,710	929,304
	Terminal cash flow
i	Release of working capital =				250,000
ii	Post tax salvage value
	180000-(180000-171912)*21%				178302
C	NWC + salvage value				428302
D=A+B+C	Net cash flow	(2,570,000)	1,019,534	1,073,710	1,357,606
D	PVIF @ 12%	1.0000	0.8929	0.7972	0.7118
E=C*D	present value	(2,570,000)	910,298	855,955	966,317		162,570
	Therefore NPV =	162,570
ans a)	Year 0 Cash flow	(2,570,000.00)
	Operating cash flow
	year -1	1,019,533.76
	year -2	1,073,710.40
	year -3	1,357,605.84
Ans b)	NPV =	162,570.38