Question

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $222,600 after 3 years. The project requires an initial investment in net working capital of $318,000. The project is estimated to generate $2,544,000 in annual sales, with costs of $1,017,600. The tax rate is 24 percent and the required return on the project is 18 percent.

MACRS

year1 33.33%

year2 44.45%

year3 14.81%

year4 7.41%

What is the project's year 0 net cash flow?

What is the project's year 1 net cash flow?

What is the project's year 2 net cash flow?

What is the project's year 3 net cash flow?

What is the NPV?

Answer 1

The cash flow in Year 0 is : Investment in fixed assets + investment in working capital

= $2900,000 + $318,000

= $3218,000

The depreciation for year 1 :

= 33.33 % * $29,00,000

= $966,570

The depreciation for Year 2 is:

= 44.45 % * $29,00,000

= $128,9050

The depreciation for Year 3 is :

= 14.81% * $29,00,000

=$429,490

The book value at the end of year 3 is :

= 7.41% * $29,00,000

= $214,890

So, the Year 1 cash flows are :

= ( $2544000 - $1017600) (1 - 0.24) + 0.24* 966570

= $1392,040.8

The cash flows in Year 2 is:

= ($2544000 - $1017600) (1 - 0.24 ) + 0.24* $128,9050

= $1160064 + $309372

= 1,46,9436

The cash flows in Year 3 is

= $1160064 + 0.24 * $429,490

= $1,263,141.6

+ The after tax salvage value is :

= Market value - ( Market value - book value ) (1 - tax rate)

= $222600 - ( $222,600 - $214,890) * 0.24

= $220,749.6

+ The recovery of working capital is : $318,000

The total cash flow in Year 3 is :

= $1,263,141.6 + $220,749.6 + $318,000

= $1801891.2

So, the NPV of the project is : $113,708.2625