Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.41 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,775,000 in annual sales, with costs of $672,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project. a. If the tax rate is 23 percent, what is the project’s Year 0 net cash flowYear 1, Year 2, Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e. g., 1,234,567.)
b. If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e. g., 1,234,567.89.)

Answer and Explanation:

The computation is shown below

Particulars               0          1                     2                  3

cost of project      -$2,410,000    

Investment in

working capital    $-380,000    

sales                                $1,775,000   $1,775,000     $1,775,000

less: cost                         -$672,000    -$672,000       -$672,000

less: depreciation           -$2,410,000   $0                    $0

operating profit               -$1,307,000   $1,103,000     $1,103,000

less tax at 23%                -$300,610      $253,690       $253,690

after tax profit                  -$1,006,390   $849,310       $849,310

add depreciation               $2,410,000    $0                 $0

after tax sale proceeds of machine                             $288,750

recovery of working capital                                         $380,000

1. Net operating cash flow

                           -$2,790,000  $1,403,610  $849,310    $1,518,060

present value of net operating cash flow is

= net operating cash flow ÷ (1 + r)^n

r = 9%

                           -$2,790,000   $1,287,715.6 $714,847.235  $1,172,220.85

2Net present value = sum of the present value of operating cash flow $384,783.69

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