Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,725,000 in annual sales, with costs of $632,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, 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 two decimal places, e.g., 1,234,567.89.) b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.) Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV

Answer 1

rate positively .

	Computation of depreciation =
	Total cost =		2310000
	year	1	2	3
	Depreciation rate	33.33%	44.45%	14.81%
	Depreciation amt	769,923	1,026,795	342,111
	book value at year -3 end	171,171
	Computation of NPV
	year	0	1	2	3
a	initial investment	(2,310,000)
b	Working capital	(280,000)
A	Initial investment	(2,590,000)
	operating cash flow
i	Annual saving=1725000-632000		1,093,000	1,093,000	1,093,000
ii	Depreciation rate		33.33%	44.45%	14.81%
iii	depreciation		769,923	1,026,795	342,111
iv=i-iii	Profit before tax		323,077	66,205	750,889
v=iv*23%	Tax@ 23%		74,308	15,227	172,704
vi=iv-v	Profit after tax		248,769	50,978	578,185
B=vi+iii	operating cash flow		1,018,692	1,077,773	920,296
	Terminal cash flow
i	Release of working capital =				280,000
ii	Post tax salvage value
	225000-(225000-17171)*23%				212619
C	NWC + salvage value				492619
D=A+B+C	Net cash flow	(2,590,000)	1,018,692	1,077,773	1,412,915
D	PVIF @ 11%	1.0000	0.9009	0.8116	0.7312
E=C*D	present value	(2,590,000)	917,741	874,745	1,033,111		235,597
	Therefore NPV =	235,597
	Answer = option	235,597
ans a)	Year 0 Cash flow	(2,590,000)
	year -1	1,018,692
	year -2	1,077,773
	year -3	1,412,915
Ans d)	NPV =	235,597