PLEASE HELP WITH NPV. I AM NOT UNDERSTANDING THIS PART Quad Enterprises is consi

Question

PLEASE HELP WITH NPV. I AM NOT UNDERSTANDING THIS PART

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of S2.94 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.) 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.)

Explanation / Answer

Calculation of Cash Flow Year 0 1 2 3 Cost of asset -2940000 Working capital required -380000 Sales 2160000 2160000 2160000 Less: Cost 855000 855000 855000 Net profit 1305000 1305000 1305000 less:Tax @34% 443700 443700 443700 Profit after tax 861300 861300 861300 Add: Tax save on depn 333200 333200 333200 Add: Working capital return 380000 Add: selvage Value 250000 Less: Tax paid on selvage 85000 Net Cash Flow -3320000 1194500 1194500 1739500 Calculation of NPV Year Cash flow PVAF 10% Value 0 -3320000 1 -3320000 1 1194500 0.9091 1085909 2 1194500 0.8264 987190.1 3 1739500 0.7513 1306912 NPV 60011.27 * Depreciation =2940000/3=980000 Taxsave on dep= 980000*34%=333200

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