Summer Tyme Inc has cash available and is considering a new 3-year expansion pro
ID: 2564543 • Letter: S
Question
Summer Tyme Inc has cash available and is considering a new 3-year expansion project that requires an initial fixed asset investment of $105.5mil. The fixed assets will be depreciated straight line to zero over its 3 three year tax life. The fixed assets will have a market value of $50,325,575 at the end of the project. The project is estimated to generate the following revenues during those 3 years: $47,843,550 for year one, $39,963,000 for year two, and $24,175,000 for year three. Costs are equal to 34.75% of the same year sales. The projects net working capital is equal to 14.5% of the next year's revenue. The tax rate is 35%
What are the projects net cash flows for years 0-3?
What is the IRR on this project?
*Show using excel
Explanation / Answer
Particulars Year 0 Year 1 Year 2 Year 3 a Initial investment (105,500,000) b Revenues 47,843,550 39,963,000 24,175,000 c Less: Costs 34.75% 16,625,634 13,887,143 8,400,813 d Gross profit 31,217,916 26,075,858 15,774,188 e Less: Depreciation (See note) 18,391,475 18,391,475 18,391,475 f Net Profit before taxes 12,826,441 7,684,383 (2,617,288) g Less: Tax (35%) 4,489,254 2,689,534 (916,051) h Net Profit after taxes 8,337,187 4,994,849 (1,701,237) i Net working capital (14.5% of next year revenue) 6,937,315 5,794,635 3,505,375 - j Change in Net working capital 1,142,680 2,289,260 3,505,375 l Net Cashflows (a+h+e+j) (105,500,000) 27,871,342 25,675,584 20,195,613 Note: Depreciation expense: Cost 105,500,000 Less: residual value 50,325,575 Depreciable value 55,174,425 Estimated useful life 3 years Deprecation per year 18,391,475 IRR of the project = -16.74%
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