Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,720,000 in annual sales, with costs of $628,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $210,000 at the end of the project. a. If the tax rate is 22 percent, what is the project’s Year 0 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, e.g., 1,234,567.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places,

	a. Year 0 cash flow $-2,570,000 Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

e.g., 1,234,567.89.)

Answer 1

solution: sales Less : costs Less : depreciation EBT Less : Tax at 22% 1,720,000.00 1,720,000.00 1,720,000.00 628,000.00 - 628,000.00 - 628,000.00 2,300,000.00 1,208,000.00 1,092,000.00 1,092,000.00 265,760.00 - 240,240.00 - 240,240.00 942,240.00 851,760.00 851,760.00 2,300,000.00 1,357,760.00 851,760.00 851.760.00 EAT Add : depreciation OCF Inital cost working capital changes after tax sale value=210000*(1-0.22) net cash flow -2,300,000.00 - 270,000.00 270,000.00 163,800.00 1285560.00 -2570000.00 1357760.00 851760.00 b) net cash flow xPV factor at 10%** PV NPV |- 2,570,000 1.00000 -2,570,000.00 334121.41 1,357,760 0.90909 1,234,327.27 2. 851,760 0.82645 703,933.88 1,285,560 0.75131 965,860.26 **PV factor working formula Year 1/(1+r)^n working 1/(1+0.1)^0 1 | 1/(1+0.1)^1 1/(1+0.1)^2 1/(1+0.1)^3 PV factor at 10% 1.00000 0.90909 0.82645 0.75131 2 3