2. Quad Enterprises is considering a new three-year expansion project that requi

Question

2. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $215,000 at the end of the project. If the tax rate is 30 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.)

  

If the required return is 13 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.)

  Years Cash Flow   Year 0 $ -3,040,000   Year 1 $ 11,86,500   Year 2 $ 11,86,500   Year 3 $ 16,47,000

Explanation / Answer

Profit = annual revenues - costs

tax = 30% of profits

net cash flow for year 1-3 is profit-tax.

NPV:

Formula used for PV calculation = amount/(discount factor)^time.

if the asset is sold at 215,000 at the end of year 3, then NPV will be:

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