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

Question

9. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset will be depreciated straight-line to zero over its 3 year tax life, after which time it will be worthless. The project is estimated to generate 2.19 million in annual sales, with costs of $815k,. If tax rate is 35%, what is the OCF for this project?
10. In the previous problem, suppose the required return on the project is 12%, what is the project's npv?
11. In the previous problem, suppose the project requires an initial investment in net working capital of $300k, and the fixed asset will have a market value of $210k at the end of the project. What is the project's Year 0 net cash flow now? Year 2? Year 3? What is the new NPV?

Explanation / Answer

9) .Using the tax shield approach to calculating OCF

      OCF = (Sales – Costs)(1 – tC) + tCDepreciation

       OCF = ($2.19M – 815K)(1 – 0.35) + 0.35($2.9M/3)

       OCF = $1232083

10 .NPV is:

       NPV = –$2.9M + $1232083(PVIFA12%,3)

       NPV = $59255.47

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