Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset will be depreciated straight- line to zero over its three-year tax life. The project is estimated to generate $1,765,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345.000 at the end of the project. a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 12 Year 2? Year 3? (Do not round Intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 11 percent, what is the project's NPV? (Do not round Intermediate calculations and round your answer to 2 decimal places, e... 32.16.) a. Year O cash flow Year 1 cash flow Year 2 cash flow Year 3 cash llow NPV b.

Answer 1

Tax rate		21%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3			Total
Cost		$    2,370,000	$   2,370,000	$    2,370,000
Dep Rate		33.33%	33.33%	33.33%
Depreciation	Cost * Dep rate	$       790,000	$      790,000	$       790,000			$       2,370,000
Calculation of after-tax salvage value
Cost of machine			$   2,370,000
Depreciation			$   2,370,000
WDV	Cost less accumulated depreciation	$                -
Sale price			$      345,000
Profit/(Loss)	Sale price less WDV	$      345,000
Tax	Profit/(Loss)*tax rate	$        72,450
Sale price after-tax	Sale price less tax		$      272,550
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
Sale		$    1,765,000	$   1,765,000	$    1,765,000
Less: Operating Cost		$       675,000	$      675,000	$       675,000
Contribution		$    1,090,000	$   1,090,000	$    1,090,000
Less: Depreciation		$       790,000	$      790,000	$       790,000
Profit before tax (PBT)		$       300,000	$      300,000	$       300,000
Tax@21%	PBT*Tax rate	$         63,000	$        63,000	$         63,000
Profit After Tax (PAT)	PBT - Tax	$       237,000	$      237,000	$       237,000
Add Depreciation	PAT + Dep	$       790,000	$      790,000	$       790,000
Cash Profit after-tax		$    1,027,000	$   1,027,000	$    1,027,000
Calculation of NPV
						11.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$ (2,370,000)	$     (360,000)		$ (2,730,000)	1.0000	$(2,730,000.00)
1				$    1,027,000	$    1,027,000	0.9009	$     925,225.23
2				$    1,027,000	$    1,027,000	0.8116	$     833,536.24
3		$       272,550	$      360,000	$    1,027,000	$    1,659,550	0.7312	$ 1,213,448.66
					Net Present Value	$     242,210.12