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 will be depreciated straight- line to zero over its three-year tax life. The project is estimated to generate $1,725,000 in annual sales, with costs of $635,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, what is the project's Year O net cash flow? Year 1? 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.g., 32.16.) Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow NPV

Answer 1

after tax salvage value:(plant) salvage value of plant YEAR 2 $1,725,000.00 $1,725,000.00 $1,725,000.00 $225,000.00 less: annual sales $635,000.00 $635,000.00 $635,000.00 $0.00 less: book value on date of sale costs $770,000.00 $770,000.00 $770,000.00 profit on sale $225,000.00 depreciation $320,000.00 $73,600.00 $320,000.00 $320,000.00 less: ЕВТ salvage value less: tax on gain tax @23% $73,600.00 $73,600.00 $225,000.00 $246,400.00 $246,400.00 $246,400.00 $51,750.00 add: EAT $770,000.00 $770,000.00 $770,000.00 $173,250.00 depreciation after tax salvage value $1,016,400.00 $1,016,400.00 $1,016,400.00 OCF initial investment: plant -$2,310,000.00 -$280,000.00 working capital after tax salvage value: $280,000.00 $173,250.00 plant $1,016,400.00 $1,469,650.00 -$2,590,000.00 $1,016,400.00 Cash flows 0.90090 0.73119 pv @ 11% 1 0.81162 $824,933.04 -$2,590,000.00 $915,675.68 $1,074,595.41 PRESENT VALUE $225,204.13 NPV -$2,590,000 $1,016,400 $1,016,400 $1,469,650 $225,204.13 a) year 0 year 1 year 2 year 3 NPV Б)