Question

Esfandairi enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.34 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. If the tax rate is 21 percent, what is the project's year 0 net cash flow? year 1? year 2? year 3? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.

Answer 1

To calculate the net cash flow for each year of the project, we need to consider the initial investment, annual sales, costs, tax rate, net working capital, and the market value of the fixed asset at the end of the project.

Step-by-step explanation:

To calculate the net cash flow for each year of the project, we need to consider the initial investment, annual sales, costs, tax rate, net working capital, and the market value of the fixed asset at the end of the project.

Year 0 Net Cash Flow: The initial fixed asset investment qualifies for 100 percent bonus depreciation in the first year. So, the net cash flow in year 0 is equal to the initial fixed asset investment - the tax benefits from the bonus depreciation.

Year 1 Net Cash Flow: The net cash flow in year 1 is equal to the sales revenue minus the costs, minus the tax on the profits, plus the change in net working capital.

Year 2 Net Cash Flow: The net cash flow in year 2 is calculated in the same way as year 1, using the sales revenue, costs, tax rate, and change in net working capital.

Year 3 Net Cash Flow: The net cash flow in year 3 is calculated in the same way as year 1 and year 2.