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 $3.3 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $256,200 after 3 years. The project requires an initial investment in net working capital of $366,000. The project is estimated to generate $2,928,000 in annual sales, with costs of $1,171,200. The tax rate is 34 percent and the required return on the project is 16 percent. (Do not round your intermediate calculations.)

    

a. -3,482,700

b.-3,299,400

c.-1,456,778

d.-1,380,106

e.-3,666,000

   

a.1,610,123

b.1,686,796

c.1,456,778

d.1,380,106

e. 1,533,451

  

a 1,658,217

b 1,610,123

c 1,380,106

d 1,741,128

e 1,575,306

  

a.1,846,694

b1,749,500

c 1,610,123

d 2,041,083

e 1,943,888

  

a. 103,557

b140,314

c133,632.55

d 126,951

e7,110,045

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.3 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $256,200 after 3 years. The project requires an initial investment in net working capital of $366,000. The project is estimated to generate $2,928,000 in annual sales, with costs of $1,171,200. The tax rate is 34 percent and the required return on the project is 16 percent. (Do not round your intermediate calculations.)

Explanation / Answer

Profit = (Revenue – Cost)*(1 – Tax)

Profit = (2,928,000 - 1,171,200)*(1 – 0.34) = 1,159,488.00

0 1 2 3 Initial investment -3,300,000 A MACRS 33.33% 44.45% 14.81% Depreciation 1,099,890.00 1,466,850.00 488,730.00 Tax saving on depreciation @ 34% 373,962.60 498,729.00 166,168.20 B Book Value (7.41%) 244,530.00 Market Value 256,200.00 After-tax MV = MV - (MV - BV)*Tax 252,232.20 C Net change in WC -366,000.00 366,000.00 D Profit 1,159,488.00 1,159,488.00 1,159,488.00 E FCF -3,666,000.00 1,533,450.60 1,658,217.00 1,943,888.40 sum A to E NPV @ 16% 133,632.55 IRR 18.12%

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