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Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.34 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 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, rounded to two decimal places, e.g., 1,234,567.89.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.34 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,740,000 in annual sales, with costs of $644,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project. a. If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 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, rounded to two decimal places, e.g., 1,234,567.89.) b. If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
The project's Year 0 cash flow is -$2,650,000Year 1 cash flow $1,029,623.62Year 2 cash flow $1,084,246.30Year 3 cash flow $1,498,329.08The project's NPV is $307,809.61The year 0 cash flow comprises the initial fixed asset investment of $2,340,000 and the initial investment in net working capital of $310,000, effectively, the sum of both cash flows gives the project's year 0 cash flowThe project’s Year 0 net cash flow=-$2,340,000-$310,000The project’s Year 0 net cash flow=-$2,650,000To determine the subsequent year's cash flows, we need to ascertain the percentages of depreciation under the three-year MACRS, which are 33.33%( year 1),44.45%(year 2),14.81%(year 3 ) and 7.41%( year 4)Year 1 depreciation=$2,340,000*33.33%=$779,922.00Year 2 depreciation=$2,340,000*44.45%=$1,040,130.00Year 3 depreciation=$2,340,000*14.81%=$346,554.00Balancing charge in year=$2,340,000*7.41%=$173,394.00Tax on disposal =($270,000-$173,394.00)*21%=$20,287.26Net cash flow from asset disposal=$270,000-$20,287.26=$249,712.74Annual cash flow=(sales-cost of sales-depreciation)*(1-tax rate)+depreciationNote depreciation is expected to be added back as it is not an outright cash outflowYear 1 cash flow=($1,740,000-$644,000-$779,922.00)*(1-21%)+$779,922.00Year 1 cash flow=$1,029,623.62Year 2 cash flow=($1,740,000-$644,000-$1,040,030.00)*(1-21%)+$1,040,030.00Year 2 cash flow= $1,084,246.30Year 3 cash flow=($1,740,000-$644,000-$ 346,554.00)*(1-21%)+$346,554.00+$310,000+$249,712.74Year 3 cash flow=$1,498,329.08NPV=$1,029,623.62/(1+10%)^1+$1,084,246.30/(1+10%)^2+$1,498,329.08/(1+10%)^3-$2,650,000NPV=$307,809.61...