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 qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,785,000 in annual sales, with costs of $680,000. The projeot requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $405,000 at the end of the project. If the tax rate is 25 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 a. and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 11 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, e.g., 1,234,567.89.) a. Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

Answer 1

Rreq a:
Cashflows for Year-0
Initial investment			-2310000
Investment in Net working capital			-400000
Cashflows of Year-0			-2710000
Annual cashflows
Annual sales			1785000
Less: Cost			680000
Net Income			1105000
less: Tax @ 25%			276250
After tax income			828750
Cashflows:
			Year-1	Year-2	Year3
After tax income			828750	828750	828750
Depreciation tax shield			577500	0	0
(2310000*25%)
Release of working capital					400000
After tax salvage value					303750
(405000*75%)
Cashflows			1406250	828750	1532500
Req b:
NPV
			Year-0	Yeara-1	Year-2	Year-3
Cashflows as computed above			-2710000	1406250	828750	1532500
PVF at 11%			1	0.900901	0.811622	0.731191
Present valuess			-2710000	1266892	672632.1	1120551
NPV			350075