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 $5.0 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $386,400 after 3 years. The project requires an initial investment in net working capital of $552,000. The project is estimated to generate $4,416,000 in annual sales, with costs of $1,766,400. The tax rate is 31 percent and the required return on the project is 12 percent. (Do not round your intermediate calculations.)

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.0 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $386,400 after 3 years. The project requires an initial investment in net working capital of $552,000. The project is estimated to generate $4,416,000 in annual sales, with costs of $1,766,400. The tax rate is 31 percent and the required return on the project is 12 percent. (Do not round your intermediate calculations.)

Explanation / Answer

Time line 0 1 2 3 Cost of equipment -5000000 Installation cost 0 Total investment in new machine -5000000 Net working capital -552000 =Initial Investment outlay -5552000 sales-cost 2649600 2649600 2649600 33.33% 44.45% 14.81% 7.41% -Depreciation MACR Rate* total investment -1666500 -2222500 -740500 370500 =Salvage value = 983100 427100 1909100 -taxes =(savings- depreciation)*(1-tax) 678339 294699 1317279 +Depreciation 1666500 2222500 740500 =after tax operating cash flow 2344839 2517199 2057779 Reversal of Net working capital 552000 Proceeds from sale of assets =selling price*(1 - tax rate) 266616 +Salvage book value * tax rate 114855 Terminal year non operating cash flows 933471 Total Cash flow for the period -5552000.00 2344839.00 2517199.00 2991250.00 Discount factor =(1+discount rate)^n 1 1.12 1.2544 1.404928 Discount rate= 12% Discounted cash flows -5552000 2093606.3 2006695.631 2129112.7 NPV= Sum of discounted cash flows 677414.548

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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