Problem 10-11 Calculating Project Cash Flow from Assets [LO1 Quad Enterprises is
ID: 2617726 • Letter: P
Question
Problem 10-11 Calculating Project Cash Flow from Assets [LO1 Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,160,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project. If the tax rate is 34 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign) Cash Flovw Years Year 0 Year 1 Year 2 Year 3 $ -3320000 If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) NPVExplanation / Answer
Years
Cash Flow
Year 0
- $33,20,000
Year 1
$1,194,500
Year 2
$1,194,500
Year 3
$1,695,300
Net Present Value [NPV]
$26,803.15
Calculations
Calculate of Annual Cash Flow
Annual Cash Flow Calculation
Annual Sales
2,160,000
Less : Costs
(855,000)
Less: Depreciation [ $29,40,000 / 3 Years ]
(980,000)
Net Income Before Tax
325,000
Less : Tax at 34%
(110,500)
Net Income After Tax
214,500
Add Back : Depreciation
980,000
Annual Cash Flow
1,194,500
Year 0 Cash outflow [Initial Investment ] = $29,40,000 + 380,000 = $33,20,000
Year 1 Cash Flow = $1,194,500
Year 2 Cash Flow = $1,194,500
Year 3 Cash Flow = $1,194,500 + [$380,000 * (1 - 0.34)] + 250,000 = $1,695,300
Net Present Value [ NPV] = Present Value of Annual cash inflows – Initial Investments
= [ 11,94,500 x 0.9090] + [ 11,94,500 x 0.82644] + [ 16,95,300 x 0.751314 ] - $33,20,000
= $1,085,909.09 + 987,190.08 + 1,273,703.98 – 33,20,000
= $26,803.15 [ Positive NPV]
Years
Cash Flow
Year 0
- $33,20,000
Year 1
$1,194,500
Year 2
$1,194,500
Year 3
$1,695,300
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