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 $3.996 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $310,800. The project requires an initial investment in net working capital of $444,000. The project is estimated to generate $3,552,000 in annual sales, with costs of $1,420,800. The tax rate is 33 percent and the required return on the project is 12 percent.

Required:
(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

answer: a) -$ 3.996 million - $444,000 = -$ 4440000 b) [$3,552,000 - $1,420,800 - ($3.996 million - $310,800)/3 ]*67% = $ 604876 c) $ 604876 d) $ 604876 + $310,800 = $ 915,676 e) - $ 2,765,968.61

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