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 $5.184 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 $403,200. 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 33 percent and the required return on the project is 11 percent. The NPV for this project is $

Explanation / Answer

Year 1 2 3 Annual Sales a $4,608,000.00 $4,608,000.00 $4,608,000.00 Costs b $1,843,200.00 $1,843,200.00 $1,843,200.00 Depreciation Rate c 33.33% 33.33% 33.33% Depreciation (c*$2.7m) d $1,728,000.00 $1,728,000.00 $1,728,000.00 Earnings before Tax e = a-b-d $1,036,800.00 $1,036,800.00 $1,036,800.00 Taxes at 33% f $342,144.00 $342,144.00 $342,144.00 Earnings after Tax g = e - f $694,656.00 $694,656.00 $694,656.00 Depreciation h $1,728,000.00 $1,728,000.00 $1,728,000.00 Cashflow from operations i = g+h $2,422,656.00 $2,422,656.00 $2,422,656.00 Working Capital Realization j $0.00 $0.00 $576,000.00 Post tax salvage value of Machine k $0.00 $0.00 $270,144.00 Net Cashflows l = I + j + k $2,422,656.00 $2,422,656.00 $3,268,800.00 PV Factor at 11% m 0.9009 0.8116 0.7312 Present Value at 11% n = m*l $2,182,572.97 $1,966,281.96 $2,390,118.39 Present Value of Inflows $6,538,973.32 Less: Initial Outflow( Machine+Working Capital) $5,760,000.00 NPV $778,973.32 Note 1 Purchase Cost of Machine $5,184,000.00 Less: Accumulated Depreciation $5,184,000.00 Book Value (a) $0.00 Market Value of Machine (b) $403,200.00 Profit on Sale on Machine (c = b-a) $403,200.00 Tax on Profit (d = c*33%) $133,056.00 Post Tax Salvage Value (b-d) $270,144.00

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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