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? 4,774,000 (b) What is the project's year 1 net cash flow (Click to select) (Click to select) (Click to select) (c) What is the project's year 2 net cash flow? (d) What is the project's year 3 net cash fow? (e) What is the NPV2? 789,069

Explanation / Answer

1097707.9

e)NPV = 830588.15

**ACCumulated depreciation= 143390+1911350+636830=3981370

Book value=4300000-3981370=318630

Gain on sale =331800-318630= 13170

Tax on sale = 13170*.33= 4346.1

After tax sale value=331800-4346.1= 327453.9

0 1 2 3 Purchase cost -4,300,000 Working capital -474,000 Revenue 3792000 3792000 3792000 less:cost -1516800 -1516800 -1516800 Depreciation -1433190 [4300000*.3333] -1911350   [4300000*.4445] 636830    [4300000*.1481] Net income before tax 842010 363850 1638370 Less:Tax -277863.3 [842010*.33] -120070.5 -540662.1 Net income after tax 564146.7 243779.5

1097707.9

Add:depreciation 1433190 1911350 636830 cash flow 1997336.7 2155129.5 1734537.9 Working capital realized 474000 After tax sale value 327453.9 cash flow -4774000 1997336.7 2155129.5 2535991.8 PVF @9% 1 .91743 .84168 .77218 cash flow *PVF -4774000 1832416.61 1813929.40 1958242.15 830588.15

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