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 falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,765,000 in annual sales, with costs of $664,000. 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 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 b. NPV

Answer 1

Time line		0	1	2	3
Cost of new machine		-2370000
Initial working capital		-360000
=Initial Investment outlay		-2730000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Sales			1765000	1765000	1765000
Profits	Sales-variable cost		1101000	1101000	1101000
-Depreciation	=Cost of machine*MACR%		-789921	-1053465	-350997	175617	=Salvage Value
=Pretax cash flows			311079	47535	750003
-taxes	=(Pretax cash flows)*(1-tax)		245752.41	37552.65	592502.37
+Depreciation			789921	1053465	350997
=after tax operating cash flow			1035673.41	1091017.65	943499.37
reversal of working capital					360000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				272550
+Tax shield on salvage book value	=Salvage value * tax rate				36879.57
=Terminal year after tax cash flows					669429.57
a. Total Cash flow for the period		-2730000	1035673.41	1091017.65	1612928.94
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631
Discounted CF=	Cashflow/discount factor	-2730000	933039.1081	885494.3998	1179359.74
b. NPV=	Sum of discounted CF=	267893.25