Problem 10-12 NPV and Modified ACRS [LO1] Quad Enterprises is considering a new

Question

Problem 10-12 NPV and Modified ACRS [LO1] Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,130,000 in annual sales, with costs of $815,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 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? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.) Years Year 0 Year 1 Year 2 Year 3 Cash Flow If the required return is 11 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

Depreciation % Depreciation amount Year Book value year 3 Initial Cost $        2,850,000 33.33%                             949,905 1 $        2,850,000 44.45%                          1,266,825 2 $        2,850,000 14.81%                             422,085 3 $        2,850,000 7.41%                     211,185 BV                     235,000 MV                        23,815 Capital gain 8097.1 tax at 34%               226,902.90 Amount realised net of tax Year 0 Year 1 Year 2 Year 3 Sales Revenue $        2,130,000 $                     2,130,000 $        2,130,000 Costs                815,000                             815,000                815,000 Depreciation                949,905                          1,266,825                422,085 Net income before tax                365,095                                48,175                892,915 Tax at 34% 124132.3 16379.5 303591.1 Net income after tax          240,962.70                          31,795.50          589,323.90 Add back depreciation                949,905                          1,266,825                422,085 OCF      1,190,867.70                    1,298,620.50      1,011,408.90 Initial cost          (2,850,000)          226,902.90 NWC              (350,000)                350,000 Cash Flows total    (3,200,000.00)      1,190,867.70                    1,298,620.50      1,588,311.80 PVF at 11% 1 0.900900901 0.811622433 0.731191381 Present value -3200000 1072853.784 1053989.53 1161359.899 NPV = sum $        88,203.21

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