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 falls into the three-year MACRS class (MACRS schedule). 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. a. If the tax rate is 21 percent, what is the project’s Year 0 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 two decimal places, e.g., 1,234,567.89.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)

Answer 1

The net cash flows for each year of the project can be calculated by considering the initial investment, sales, costs, tax rate, net working capital, and salvage value. The project's NPV can be calculated by discounting the net cash flows at the required return rate and subtracting the initial investment.

Step-by-step explanation:

To calculate the net cash flows for each year of the project, we need to consider the initial investment, sales, costs, tax rate, net working capital, and salvage value.

a. For Year 0, the net cash flow is calculated as the initial fixed asset investment plus the initial investment in net working capital: $2.34 million + $310,000 = $2.65 million (negative). For Year 1, the net cash flow is calculated as the difference between sales and costs, minus the tax on the depreciation deduction: ($1,740,000 - $644,000) * (1 - 0.21) = $837,960. For Year 2 and Year 3, the net cash flows are calculated in the same way: ($1,740,000 - $644,000) * (1 - 0.21) = $837,960.

b. To calculate the project's NPV, we need to discount the net cash flows at the required return rate and subtract the initial investment. Using a financial calculator or spreadsheet, we can calculate the present value of each year's net cash flow and sum them to get the NPV. If the required return is 10%, the NPV can be calculated as follows: NPV = -$2.65 million + $837,960 / (1 + 0.10) + $837,960 / (1 + 0.10)^2 + $837,960 / (1 + 0.10)^3 = $1,120,772.42 (rounded to two decimal places).