P10-12 NPV and Modified ACRS [LO1] Summer Tyme, Inc., is considering a new 3-yea
ID: 2779643 • Letter: P
Question
P10-12 NPV and Modified ACRS [LO1] Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.0 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $231,000 after 3 years. The project requires an initial investment in net working capital of $330,000. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 34 percent and the required return on the project is 16 percent. (Do not round your intermediate calculations.)
What is the project's net year 0 cash flow? Net year 1 cash flow? Net year 2 cash flow? Net year 3 cash flow? What is the NPV?
Explanation / Answer
NPV :585004.95
**Carrying value of asset at end:cost *[1-accumulated depreciaition]
= 3000000*[1-(.3333-.4445-.1481)]
= 3000000*.0741
= 222300
Gain on sale :231000-222300= 8700
Tax on sale :8700*.34= 2958
After tax sale value = 231000-2958= 228042
Initial cost Year 1 2 3 Purchase cost -3,000,000 Working capital -330,000 Annual sales 2,640,000 2,640,000 2,640,000 less:cost -1,056,000 -1,056,000 -1,056,000 Depreciation -999,900 [3000000*.3333] -1,335,000 [3000000*.4445] 444,300 [3000000*.1481] Net income before tax 584100 249000 1139700 Add depreciaion being non cash 999900 1335000 444300 operating cash flow 1584000 1584000 1584000 Working capital recovered 330000 after tax sale value 228042 Net cash flow -3330000 1584000 1584000 2142042 PVF@16% 1 .86207 .74316 .64066 Net present value [net cash flow *PVF] -3330000 1365518.88 1177165.44 1372320.63. 585004.95Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.