Summer Tyme, Inc. has cash available and is considering a new three-year expansi

Question

Summer Tyme, Inc. has cash available and is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed assets will be depreciated straight-line to zero over its three-year tax life. The fixed assets will have a market value of $200,000 at the end of the project. The project is estimated to generate following revenues during those three years: $2,000,000 for year one, $2,500,000 for year two, and $3,000,000 for year three. Costs are equal to 20% of the same year sales. The project net working capital is equal to 10% 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?

Revenue t=1 $        3,800,000 Revenue t=2 $        4,700,000 Revenue t=3 $        5,100,000 Investment $      10,200,000 Depr. years        3 SL Final book value $                     -   FA Sale value $           650,000 NWC req't 12.00% Costs 27.50% Tax rate 35.00% Year 0 Year 1 Year 2 Year 3 Revenue $                     -   $        3,800,000 $          4,700,000 $        5,100,000 Expenses $                     -   Depreciation $                     -   EBIT $                     -   Taxes $                     -   Net Income (NI) $                     -   CF from Operations $                     -   NWC total req't Change in NWC CF -Capital Spending Total CF Project IRR Problem 2 Use Excel formulas for a) and c) below Year 0 Year 1 Year 2 Year 3 Total Cash Flow $           (12,500) $               4,100 $                 4,535 $               6,100 Discount rate 12.50% a)   NPV b) Accept/Reject c)    IRR

Explanation / Answer

Calculation of Cash Outflow : Year PVf Amount ($) Present Value Cost of Project 0 1 3900000 3900000 Calculation of Cash Inflow Yr 1 Yr 2 Yr 3 Sales 2000000 2500000 3000000 Less : Cost (20 % of sales) 400000 500000 600000 Less: Depreciation (3900000/3yr) 1300000 1300000 1300000 PBT 300000 700000 1100000 Less: Tax 105000 245000 385000 PAT 195000 455000 715000 Add : Dep 1300000 1300000 1300000 CFAt 1495000 1755000 2015000 Less: Working capital 250000 300000 300000 (Assumed same sales in next yr) (2500000*.10) (3000000*.10-250000) Add: reversal of W.C 0 0 300000 Add: Salvage Value(1-tax) 0 0 130000 Net Cash Flow 1245000 1455000 2145000

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