Problem 10-11 Calculating Project Cash Flow from Assets [LO1] Quad Enterprises i

Question

Problem 10-11 Calculating Project Cash Flow from Assets [LO1]

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. 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.)

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. 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.)

Explanation / Answer

Cost of the Fixed Asset = $2730000 Salvage Value                   = 2090000 Life of the Asset = 3 years Annual Depreciation = (2730000-215000)/3 = 838333 Initial Outlay = Cost of the Machine + investment in net working capital                            = 2730000 + 310000 = $ 3040000 Estimated Annual Cash Fow Sales 2090000 Less : Cost 785000 Net Income 1305000 Less : Depreciation 838333 Net Income before Tax 466667 Less: Tax @ 30% 140000 Net Income After Tax 326667 Add : Depreciation 838333 Cash Flow after Tax per year 1165000 Cash inflow in year 3 = Cash Flow after Tax + Salvage Value of Plant                                             = 1380000 Years Cash Flow   Year 0 -3040000   Year 1 1165000   Year 2 1165000   Year 3 1380000 Discounting rate = 13 % Computation of NPV Years Cash Flow PV Factor PV of Cash Flow   Year 0 -3040000 1 -3040000   Year 1 1165000 0.884956 1030973.36   Year 2 1165000 0.783147 912365.81   Year 3 1380000 0.69305 956409.22 NPV -140251.61

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