Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.735 million in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent. a) what is the projects year 0,1,2,3 net cash flow?
b) if the required return is 12 percent, what is the project's NPV?

Quad Enterprises

a. The project's net cash flow:

Year 0    -$2.32 million

Year 1     $857,150

Year 2    $857,150

Year 3    $857,150

b. The project's NPV is -$261,126

Explanation:

a) Data and Calculations:

Initial cost of investment in fixed asset = $2.32 million

Estimated annual sales = $1,735,000

Estimated annual costs =     650,000

Before-tax income           $1,085,000

Company tax (21%)               227,850

Net income/cash flow        $857,150

a. The project's net cash flow:

Year 0    -$2.32 million

Year 1     $857,150

Year 2    $857,150

Year 3    $857,150

b. The project's NPV, if the required return is 12%:

Period    Cash Flows          

Annuity Factor for 3 years at 12% = 2.402

Year 0    -$2.32 million    -$2.32 million

Year 1     $857,150

Year 2    $857,150

Year 3    $857,150           $2,058,874 ($857,150 * 2.402)

NPV =                               -$261,126