Question

quad enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of 2.38 million.The fixed asset falls into three-year MACRS class. The project is estimated to generate 1,805,000 in annual sales, with costs of 696,000. The project requires an initial investment in net working capital of 440,000, and the fixed asset will have a market value of 465,000 at the end of the project.

a. If the tax rate is 24 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3?

b. If the required return is 11 percent, what is the project's NPV?

Answer 1

after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale less: less: $465,000.00 $176,358.00 $288,642.00 1 $1,805,000.00 $696,000.00 $793,254.00 $315,746.00 $75,779.04 $239,966.96 $793,254.00 $1,033,220.96 2 $1,805,000.00 $696,000.00 $1,057,910.00 $51,090.00 $12,261.60 $38,828.40 $1,057,910.00 $1,096,738.40 3 $1,805,000.00 $696,000.00 $352,478.00 $756,522.00 $181,565.28 $574,956.72 $352,478.00 $927,434.72 less: salvage value less: tax on gain after tax salvage value $465,000.00 $69,274.08 $395,725.92 add: YEAR annual sales costs depreciation EBT tax @24% EAT depreciation OCF initial investment: plant working capital after tax salvage value: plant Cash flows pv @ 11% PRESENT VALUE NPV -$2,380,000.00 $440,000.00 $440,000.00 -$2,820,000.00 1 -$2,820,000.00 $290,175.05 $1,033,220.96 0.90090 $930,829.69 $1,096,738.40 0.81162 $890,137.49 $395,725.92 $1,763,160.64 0.73119 $1,289,207.86 year 0 year 1 year 2 year 3 NPV -$2,820,000.00 $1,033,221 $1,096,738 $1,763,161 $290,175.05