Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.158 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $323,400. The project requires an initial investment in net working capital of $462,000. The project is estimated to generate $3,696,000 in annual sales, with costs of $1,478,400. The tax rate is 32 percent and the required return on the project is 18 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)   -4,620,000   -4,851,000   -4,389,000   -4,158,000   -5,082,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)   1,951,488   2,146,637   2,049,062   1,853,914   1,756,339

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)   2,049,062   1,853,914   1,756,339   2,146,637   1,951,488

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)   2,765,070   2,896,740   2,501,730   2,370,060   2,633,400

  

(e)	What is the NPV?

Answer 1

Cashflows of Year -0
Initial invstment in FA			-4158000
Investment in WC			-462000
Cashflows of Year -0			-4620000
Cashflows of Year -1 and 2
Annual sales			3696000
Less: Annual cost			-1478400
Less: Depreciation (4158000/3)			-1386000
Before tax Income			831600
Less: tax @ 32%			266112
After tax Income			565488
Add: Depreciation			1386000
Annual cashflows			1951488
Cashflows of Year -3
Annual sales			3696000
Less: Annual cost			-1478400
Less: Depreciation (4158000/3)			-1386000
Before tax Income			831600
Less: tax @ 32%			266112
After tax Income			565488
Add: Depreciation			1386000
Annual cashflows			1951488
Add: Release of WC			462000
Add: After tax Salvage			219912
	(323400-32%)
Annual cash flows of Year-3			2633400
NPV
Year	Cashflowws	PVF at 18%	Present value
0	-4620000	1	-4620000
1	1951488	0.847458	1653803
2	1951488	0.718184	1401528
3	2633400	0.608631	1602769
Net Present value			38100