Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.9 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $462,000 after 3 years. The project requires an initial investment in net working capital of $660,000. The project is estimated to generate $5,280,000 in annual sales, with costs of $2,112,000. The tax rate is 34 percent and the required return on the project is 15 percent. (Do not round your intermediate calculations.) Required: (a) What is the project's year 0 net cash flow? (b) What is the project's year 1 net cash flow? (c) What is the project's year 2 net cash flow? (d) What is the project's year 3 net cash flow? (e) What is the NPV?

Answer 1

	Note 1
	Computation of MARC depreciation		1	2	3
	Depreciation rate		33.33%	44.45%	14.81%
	Depreciation amount		1,966,470	2,622,550	873,790
	Note 2
	Computation of post tax salvage value
	Sales price of asset =		462,000
	book value =		437,190
	Gain on sales		24,810
	Tax on gain		8,435
	Post tax salvage value=		453,565
	sales - cost =
	5,280,000-2,112,000.		3168000
	year	0	1	2	3
	Initial investment	(5,900,000)
	Working capital	(660,000)			660,000
	Operating cash flow
	Sales- cost		3,168,000	3,168,000	3,168,000
	depreciation		1,966,470.00	2,622,550.00	873,790.00
	Profit before tax		1,201,530.00	545,450.00	2,294,210.00
	Tax @ 34%		408,520.20	185,453.00	780,031.40
	Net income		793,009.80	359,997.00	1,514,178.60
	Operating cash flow		2,759,479.80	2,982,547.00	2,387,968.60
	Post tax salvage value
	Note -2				453,565
	Net cash flow	(6,560,000.00)	2,759,479.80	2,982,547.00	3,501,533.20
	PVIF @ 15%	1	0.869565217	0.756143667	0.657516232
	Present value	(6,560,000.00)	2,399,547.65	2,255,234.03	2,302,314.92	397,096.60
ans a)	Year 0 Cash flow	(6,560,000.00)
ans b)	Year 1 Cash flow	2,759,479.80
ans c)	Year 2 Cash flow	2,982,547.00
ans d)	Year 3 Cash flow	3,501,533.20
ans e)	NPV=	397,096.60