Question

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $1,810,000 in annual sales, with costs of $700,000. The project requires an initial investment in net working capital of $450,000, and the fixed asset will have a market value of $480,000 at the end of the project. If the tax rate is 25 percent, 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? (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.)

1) Year 0 cash flow
2) Year 1 cash flow
3) Year 2 cash flow
4) Year 3 cash flow

Answer 1

The year 0 cash flow for the project is -$2.74 million, while the year 1, 2, and 3 cash flows are $1.11 million each.

Step-by-step explanation:

The net cash flow for a project can be calculated by subtracting the initial investment from the total cash inflows over the project's lifespan. Let's calculate the net cash flows for each year of the project:

1. Year 0 cash flow: The initial investment in fixed assets is $2.29 million, and the initial investment in net working capital is $450,000. Therefore, the year 0 cash flow is -$2.29 million - $450,000 = -$2.74 million.
2. Year 1 cash flow: The sales revenue is $1,810,000, and the cost of goods sold is $700,000. Therefore, the year 1 cash flow is $1,810,000 - $700,000 = $1,110,000.
3. Year 2 cash flow: The sales revenue and cost of goods sold are the same as in year 1, so the year 2 cash flow is also $1,110,000.
4. Year 3 cash flow: The sales revenue and cost of goods sold are the same as in year 1 and 2, so the year 3 cash flow is also $1,110,000.