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

ID: 2709105 • Letter: S

Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.698 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 $365,400. The project requires an initial investment in net working capital of $522,000. The project is estimated to generate $4,176,000 in annual sales, with costs of $1,670,400. The tax rate is 32 percent and the required return on the project is 11 percent.

Explanation / Answer

(a) Year-0 Net Cash flow for the project will be

cost of Fixed Asset= 4,698,000

Additional working Captial 540,000

Total Net Cash flow at Year 0 is equal to 5,220,000

(b) Year -1 Net Cash flow will be as follows.

So Net cash flow for Year-1 will be 22,04,928.

(d) In year-3 There will ne Additional Net Cash inflow due to release of Working Capital and Sale of Fixed Asset.

Net Cash flow will be as follows

Net Cash flow as per above for year-3 $22,04,928

Add: Release of Working Capital $522,000

Add: After Tax Sale Proceeds of Fixed Asset (365,400*68%) $248,472

Total Net Cash flow for the Year -3 is $2,975,400

(e) NPV is as Follows

NPV of the project is $7,31,577

Amount($) Sales 4,176,000 Less: Cost 1,670,400 Profit before depreciation 2,505,600 Depreciation 1,566,000 Profit before Tax 939,600 Tax @ 32% 300,672 Profit after tax 638,928 Add Depreciation 22,04,928

Navigate

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

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

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

Question

Explanation / Answer

Related Questions

Navigate