Question

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent.

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
b. If the required return is 12 percent, what is the project's NPV?
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.)

Answer 1

The Year 0 net cash flow is -$785,000. The net cash flows for Years 1 and 2 are $1,035,000 each. The net cash flow for Year 3 is $605,000. The project's NPV can be calculated by discounting the net cash flows at a rate of 12% and summing them up.

Step-by-step explanation:

The net cash flow for Year 0 can be calculated by subtracting the initial fixed asset investment and initial net working capital from the annual sales. In this case, it would be $1.645 million - $2.18 million - $250,000 = - $785,000.

The net cash flow for Year 1 can be calculated by subtracting the costs from the annual sales. In this case, it would be $1.645 million - $610,000 = $1,035,000.

The net cash flow for Year 2 can be calculated the same way, $1.645 million - $610,000 = $1,035,000.

The net cash flow for Year 3 can be calculated by subtracting the costs, the fixed asset market value, and the recovery of net working capital from the annual sales. In this case, it would be $1.645 million - $610,000 - $180,000 - $250,000 = $605,000.

The project's NPV can be calculated by discounting the net cash flows using the required return rate of 12% and summing them up. In this case, the NPV would be the present value of the Year 0 net cash flow plus the present value of the net cash flows for Years 1, 2, and 3.