Question

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $1,725,000 in annual sales, with costs of $635,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. The tax rate is 23 percent, what is the project’s year 0 net cash flow?

Options:
A) $1,485,000
B) $1,515,000
C) $1,425,000
D) $1,375,000

Answer 1

The project's year 0 net cash flow for Esfandairi Enterprises is the cash outflow of the initial investments which are $2,310,000 for fixed assets and $280,000 for net working capital, totaling $2,590,000. This calculated figure does not match any of the provided answer options, suggesting a possible error in the question or the provided options.

Step-by-step explanation:

The question asks for the project's year 0 net cash flow for Esfandairi Enterprises, which includes the initial fixed asset investment and the investment in net working capital. To calculate the net cash flow at year 0, one must consider the initial outflows. The initial fixed asset investment is $2.31 million, which is a cash outflow, and there is also an initial investment in net working capital amounting to $280,000. The sum of these two amounts represents the total initial cash outflow.

To find the net cash flow we calculate:

• Initial Investment in Fixed Assets: $2,310,000
• Initial Investment in Net Working Capital: $280,000
• Total Initial Investment (Sum of the above): $2,310,000 + $280,000 = $2,590,000

Thus, the project's year 0 net cash flow is a cash outflow (negative cash flow) of $2,590,000. This option is not listed among the choices provided in the question, indicating a possible discrepancy between the question data and the answer options.