Question

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset will be depreciated on a three-year MACRS schedule. The project is estimated to generate $2,190,000 in annual sales, with costs of $815,000. The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. What is the project's Year 0 net cash flow? Year 1 ? Year 2 ? Year 3 ? The tax rate is 21 percent. If the required return is 12 percent, what is the project's NPV? Sales Costs Depreciation EBT Taxes Net income Fixed asset book value in three years Aftertax salvage value Sell equipment Taxes Aftertax cash flow Capital spending Net working capital OCF Net cash flow NPV

Answer 1

The net cash flow for Year 0 is -$3,200,000. The net cash flow for Year 1 and Year 2 is $1,375,000 each. The net cash flow for Year 3 is $2,014,350. The project's NPV is $1,264,855.67.

Step-by-step explanation:

To calculate the net cash flow for each year, we need to consider the sales, costs, depreciation, taxes, salvage value, capital spending, and net working capital. In Year 0, the net cash flow is equal to the initial fixed asset investment subtracted by the initial investment in net working capital. So, Year 0 net cash flow = -$2,900,000 - $300,000 = -$3,200,000. In Year 1, the net cash flow is equal to the difference between the operating cash flow (OCF) and capital spending. So, Year 1 net cash flow = OCF - capital spending = ($2,190,000 - $815,000) - $0 = $1,375,000. In Year 2, the net cash flow is also equal to the difference between the OCF and capital spending. So, Year 2 net cash flow = OCF - capital spending = ($2,190,000 - $815,000) - $0 = $1,375,000. In Year 3, the net cash flow is equal to the sum of the OCF, salvage value, and tax savings from depreciation. So, Year 3 net cash flow = OCF + salvage value + tax savings from depreciation = ($2,190,000 - $815,000) + $210,000 + (0.21 * $815,000) = $2,014,350.

To calculate the project's NPV, we need to discount the net cash flows to the present value. Using a required return rate of 12%, we can calculate the present value factor for each year using the formula: Present Value Factor = 1 / (1 + Required Return Rate)^Year. The present value of each year's net cash flow is then calculated by multiplying the net cash flow by the present value factor. After discounting the net cash flows, the project's NPV is equal to the sum of the present values of all the cash flows. So, the project's NPV = Present Value of Year 0 net cash flow + Present Value of Year 1 net cash flow + Present Value of Year 2 net cash flow + Present Value of Year 3 net cash flow = -3,200,000 + (1,375,000 / (1 + 0.12)) + (1,375,000 / (1 + 0.12)^2) + (2,014,350 / (1 + 0.12)^3) = $1,264,855.67.