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Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment...

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $151,200 after 3 years. The project requires an initial investment in net working capital of $216,000. The project is estimated to generate $1,728,000 in annual sales, with costs of $691,200. The tax rate is 21 percent and the required return on the project is 12 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?

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Answer #1

Answer:

Project's year 0 net cash flow = - $2,116,000.00

Project's year 1 net cash flow = $952,058.70

Project's year 2 net cash flow = $996,427.50

Project's year 3 net cash flow = $1,243,177.80

NPV = $413,267.72

Workings:

Year Initial fixed asset investment Working capital investment 0 1 2 $1,900,000.00 ($216,000.00 $216,000.00 $1,728,000.00 $1,728,000.00 $1,728,000.00 $691,200.00($691,200.00)($691,200.00 33.33% 44.45% 14.81% Depreciation rate Depreciation Earnings before tax Tax at 21% Earnings after tax Add back depreciation Operating cash flow Book value at end of vear 3 Sale value Tax on Gain Sale value net of tax Cash flow PV factor at 12% [1/(1+12%)/year] Discounted cash flow NPV $633,270.00($844,550.00)($281,390.00 0.00 $755,410.00 $84,741.30($40,372.50($158,636.10 $318,788.70 $151,877.50 $596,773.90 $633,270.00 $844,550.00 $281,390.00 $952,058.70 $996,427.50 $878,163.90 $140,790.00 $151,200.00 $2,186.10 $149,013.90 427.50$1,243,177.80 0.7117802 0,052.41 $794,345.90 $884,869.40 $403,530.00 $192,25 ($2,116,000.00) $952,058.70 0.8928571 0.7971939 ($2,116,000.00) $850,052.41 $413,267.72

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