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 $4.3 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $331,800 after 3 years. The project requires an initial investment in net working capital of $474,000. The project is estimated to generate $3,792,000 in annual sales, with costs of $1,516,800. The tax rate is 33 percent and the required return on the project is 9 percent. (Do not round your intermediate calculations.) Required (a) What is the project's year 0 net cash flow? (Click to select) (b) What is the project's year 1 net cash flow? | (Click to select) (c) What is the project's year 2 net cash flow? (Click to select) (d) What is the project's year 3 net cash flow? (Click to select) (e) What is the NPV? (Click to select

Explanation / Answer

NPV is calculated through

NPV=-Co+ C1/(1+R)^1+C2/(1+R)^2+C3/(1+R)^3
a) Initial outlay of cash Co= Initial investment in the Fixed asset + Initial investment in working capital

= $43,00,000+$474000=$4774000

B) Project cash flow for the first year C1=((Annual sales - Annual cost)* (1-Tax rate))/(1+R)^1

=((3792000-1516800)*(1-0.33))/(1+0.09)^1

=$1398517

C) Project cash flow for the first year C2=((Annual sales - Annual cost)* (1-Tax rate))/(1+R)^2

=((3792000-1516800)*(1-0.33))/(1+0.09)^2

=$1283044

D) Project cash flow for the first year C3=((Annual sales - Annual cost)+ Salvage value* (1-Tax rate))/(1+R)^3

= ((3792000-1516800)+(331800)*(1-0.33))/(1+0.09)^3

=$1348765

E) NPV= -C0+ PVCF1+PVCF+PVCF3

=-$4774000+($1398517+$1283044+$1348765)

=-$4774000+$4030326

=-743674

Since NPV is negative its not viable take up the project.

(ends)

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