Summer Tyme, Inc., is considering a new 3-year expansion project that requires a

Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.1 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $243,600 after 3 years. The project requires an initial investment in net working capital of $348,000. The project is estimated to generate $2,784,000 in annual sales, with costs of $1,113,600. The tax rate is 33 percent and the required return on the project is 17 percent. (Do not round your intermediate calculations.)(a) What is the project's year 0 net cash flow?(b) What is the project's year 1 net cash flow? (c) What is the project's year 2 net cash flow?(d) What is the project's year 3 net cash flow?(e) What is the NPV?

Explanation / Answer

PV of cash flows = Cash flow / (1+i)^N where i is the required rate of return and n is the number of period.

Year Assest cost working capital Depreciation sales cost of sales Dep Net cash flow Tax @ 33% after tax cash flow Tax benefit from depreciation Net cash flow Salvage value Total cash flow PV @ 17% 0          3,100,000    348,000 (3,448,000) (3,448,000.00) 1 33.33%    2,784,000    1,113,600    1,033,230       637,170    426,904    210,266           340,966    551,232         551,232         471,138.46 2 44.45%    2,784,000    1,113,600    1,377,950       292,450    195,942      96,509           454,724    551,232         551,232         402,682.45 3 14.81%    2,784,000    1,113,600       459,110    1,211,290    811,564    399,726           151,506    551,232          243,600         794,832         496,269.70 NPV (2,077,909.39)

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