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 $5.2 million. The fixed asset falls into the 3-year MACRS class and will have a market value of $403,200 after 3 years. The project requires an initial investment in net working capital of $576,000. The project is estimated to generate $4,608,000 in annual sales, with costs of $1,843,200. The tax rate is 31 percent and the required return on the project is 9 percent. what is the projects net cash flow at 0, 1, 2, 3 and what is NPV?

Explanation / Answer

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.2 million. The fixed asset falls into the 3-year MACRS class and will have a market value of $403,200 after 3 years. The project requires an initial investment in net working capital of $576,000. The project is estimated to generate $4,608,000 in annual sales, with costs of $1,843,200. The tax rate is 31 percent and the required return on the project is 9 percent. what is the projects net cash flow at 0, 1, 2, 3 and what is NPV?

Net Cash flow at 0 =- (5,200,000 + 576000) = -5,776,000

Net Cash flow at 1 = (4608000 - 1843200 )*0.69 +(0.333*5,200,000*0.31)= 2,444,508

Net Cash flow at 2 = (4608000 - 1843200 )*0.69 + (0.445*5200000*0.31) = 2,625,052

Net Cash flow at 3 = (4608000 - 1843200 )*0.69 + (0.148*5200000*0.31)+576000 + 403200 - (403200-0.074*5200000)*0.31 = $3,119,784

NPV= -5776000 + 2444508/1.09 + 2625052/(1.09)^2 + 3119784/(1.09)^3 = $1,085,167.31

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.