Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1.735 million in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $250,00O, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent 10 points Skipped a. 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 2 decimal places, e.g., 1,234,567.89.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) eBook Print References Year 0 а. Year 1 Year 2 Year 3 b. NPV

Answer 1

1 less: less: after tax salvage value:(plant) salvage value of plant book value on date of sale profit on sale $1,735,000.00 $650,000.00 $343,592.00 $741,408.00 $155,695.68 $180,000.00 $171,912.00 $8,088.00 $1,735,000.00 $650,000.00 $773,256.00 $311,744.00 $65,466.24 $246,277.76 $773,256.00 $1,019,533.76 less: 2 $1,735,000.00 $650,000.00 $1,031,240.00 $53,760.00 $11,289.60 $42,470.40 $1,031,240.00 $1,073,710.40 add: calvage value salvage value less: tax on gain after tax salvage value $180,000.00 $1,698.48 $178,301.52 $343,592.00 $929,304.32 YEAR annual sales costs depreciation EBT tax @21% EAT depreciation OCF initial investment: plant -$2,320,000.00 working capital -$250,000.00 after tax salvage value: plant Cash flows -$2,570,000.00 pv @ 12% 1 PRESENT VALUE -$2,570,000.00 NPV $162,570.38 $250,000.00 $1,019,533.76 0.89286 $910,298.00 $1,073,710.40 0.79719 $855,955.36 $178,301.52 $1,357,605.84 0.71178 $966,317.02 year 0 year 1 year 2 year 3 b) NPV $2,570,000 $1,019,534 $1,073,710 $1,357,606 $162,570.38