Firm AAA is considering a new three-year new project that requires an initial fixed asset investment...

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Firm AAA is considering a new three-year new project thatrequires an initial fixed asset investment of $2.28 million. Thefixed asset will be depreciated straight-line to zero over itsthree-year tax life, after which time it will be worthless. Theproject is estimated to generate $2,120,000 in annual sales, withcosts of $745,000. The project requires an initial investment innet working capital of $260,000, and the fixed asset will have amarket value of $280,000 at the end of the project.
If the tax rate is 35 percent, what is the project’s year 0 netcash flow? And what are the free cash flow at Year 1? Year 2? Year3
Should the firm accept the project if the required return rateis 15%? Why? Please show your calculation in details.

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3.6 Ratings (666 Votes)

Years Cash Flow Projects year 0 net cash flow 2540000 Projects year 1 net cash flow 1159750 Projects year 2 net cash flow 1159750 Projects year 3 net cash flow 1601750 Calculate of Annual Cash Flow Annual Sales 2120000 Less Costs 745000 Less Depreciation See Answer

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Firm AAA is considering a new three-year new project thatrequires an initial fixed asset investment of $2.28 million. Thefixed asset will be depreciated straight-line to zero over itsthree-year tax life, after which time it will be worthless. Theproject is estimated to generate $2,120,000 in annual sales, withcosts of $745,000. The project requires an initial investment innet working capital of $260,000, and the fixed asset will have amarket value of $280,000 at the end of the project.If the tax rate is 35 percent, what is the project’s year 0 netcash flow? And what are the free cash flow at Year 1? Year 2? Year3Should the firm accept the project if the required return rateis 15%? Why? Please show your calculation in details.