Summer Tyme, Inc., is considering a new 3-year expansion project that requires a
ID: 2780004 • Letter: S
Question
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.8 million. The fixed asset falls into the 3-year MACRS class (Use MACRS Table) and will have a market value of $369,600 after 3 years. The project requires an initial investment in net working capital of $528,000. The project is estimated to generate $4,224,000 in annual sales, with costs of $1,689,600. The tax rate is 33 percent and the required return on the project is 13 percent. (Do not round your intermediate calculations.
a. -2,114,695
b. -5,328,000
c. -5,061,600
d. -2,003,396
e. -4,795,200
a. 2,114,695
b. 2,337,295
c. 2,448,595
d. 2,003,396
e. 2,225,995
a. 2,337,295
b. 2,522,243
c. 2,402,136
d. 2,003,396
e. 2,282,029
a. 2,966,927
b. 2,543,080
c. 2,825,645
d. 2,337,295
e. 2,684,363
a. 10,584,039
b. 390,547
c. 457,373
d. 481,445.69
e. 505,518
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.8 million. The fixed asset falls into the 3-year MACRS class (Use MACRS Table) and will have a market value of $369,600 after 3 years. The project requires an initial investment in net working capital of $528,000. The project is estimated to generate $4,224,000 in annual sales, with costs of $1,689,600. The tax rate is 33 percent and the required return on the project is 13 percent. (Do not round your intermediate calculations.
Explanation / Answer
Initial invesetment = $4800000
Sales = 4224000
Cost = 1689600
Initial networking capital =528000
Ending market value369600
Tax rate = 33%
Req.rate of return=13%
1yr = $4800,000(0.3333) =$ 1599840
2 yr = $4800,000 (0.4445)=2133600
3 yr = $4800,000 (0.1481)=710880
1Q. What is the project's year 0 net cash flow?
a. -2,114,695
b. -5,328,000
c. -5,061,600
d. -2,003,396
e. -4,795,200
Answer = b.
Initial investment + initial net working capital = 4800000 + 528000 = 5328000
2Q. What is the project's year 1 net cash flow?
a. 2,114,695
b. 2,337,295
c. 2,448,595
d. 2,003,396
e. 2,225,995
Answer = e
(1-T) X (Sales – Costs) + T X Dep.
(1 - .33) X 4224000 – 1689600) + .33X1599840
0.67x2534400+527947.2 = 2225995.2
3. What is the project's year 2 net cash flow?
a. 2,337,295
b. 2,522,243
c. 2,402,136
d. 2,003,396
e. 2,282,029
Answer is c. i.e., 2402136
(1-T) X (Sales – Costs) + T X Dep.
(1 - .33) X 4224000 – 1689600) + .33X2133600
0.67x2534400+704088 = 2402136
4Q. What is the project's year 3 net cash flow?
a. 2,966,927
b. 2,543,080
c. 2,825,645
d. 2,337,295
e. 2,684,363
((1-T) X (Sales – Costs) + T X Dep.) + (ending market value x (1 - .33))+initial net working capital
=((1 - .33) X 4224000 – 1689600) +0 .33X710880) + (369600x0.67) + 528000
= (1698048 + 234590.4)+247632+528000
=2708270.4
5Q. What is the NPV?
a. 10,584,039
b. 390,547
c. 457,373
d. 481,445.69
e. 505,518
NPV = -$5,328,000 + ($2,225,995.2 / 1.13) + ($2,402,136 / 1.13^2) + ($2708270.4 / 1.13^3)= -$5,328,000 + 1969907.26 + 1881224.84 + 1876967.24
= -$5,328,000 + 5728099.34
= 400099.34
The value is nearer to answer b. So the answer is b.
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