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 $3.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $302,400 after 3 years. The project requires an initial investment in net working capital of $432,000. The project is estimated to generate $3,456,000 in annual sales, with costs of $1,382,400. The tax rate is 32 percent and the required return on the project is 15 percent. (Do not round your intermediate calculations.)

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

Investment in machinery and equipment $(3900000) Investment in working capital (432,000) Annual cash inflows, by year: $2073600*.68 * .8696 = 1226177.74 2073600 *.68* 1.6257 = 2292315.034 2073600 * .68* 2.2832= 3219421.59 Salvage value = $302400 * 2.2832= 690439.68 Net present value= 1226177.74+ 2292315.034+ 3219421.59+ 690439.68- 432,000-3900000 =$3096354.044

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