Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.59 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 $357,000. The project requires an initial investment in net working capital of $510,000. The project is estimated to generate $4,080,000 in annual sales, with costs of $1,632,000. The tax rate is 30 percent and the required return on the project is 8 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)-4,845,000-5,610,000-4,590,000-5,100,000-5,355,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)2,281,2301,955,3402,063,9702,172,6002,389,860

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)2,172,6002,281,2301,955,3402,389,8602,063,970

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)2,639,2503,079,1252,932,5002,785,8753,225,750

  

(e)	What is the NPV?
	(Click to select)1,102,2342,032,313-917,1521,009,0011,157,346

Answer 1

Initial Investment = $4,590,000
Life of Project = 3 years

Annual Depreciation = Initial Investment / Life of Project
Annual Depreciation = $4,590,000 / 3
Annual Depreciation = $1,530,000

Initial NWC Required = $510,000
NWC recovered = $510,000

Annual OCF = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual OCF = ($4,080,000 - $1,632,000) * (1 - 0.30) + 0.30 * $1,530,000
Annual OCF = $2,172,600

Salvage Value = $357,000
After-tax Salvage Value = $357,000 * (1 - 0.30)
After-tax Salvage Value = $249,900

Answer a.

Net Cash Flows = Initial Investment + Initial NWC required
Net Cash Flows = -$4,590,000 - $510,000
Net Cash Flows = -$5,100,000

Answer b.

Net Cash Flows = Annual OCF
Net Cash Flows = $2,172,600

Answer c.

Net Cash Flows = Annual OCF
Net Cash Flows = $2,172,600

Answer d.

Net Cash Flows = Annual OCF + NWC recovered + After-tax Salvage Value
Net Cash Flows = $2,172,600 + $510,000 + $249,900
Net Cash Flows = $2,932,500

Answer e.

NPV = -$5,100,000 + $2,172,600/1.08 + $2,172,600/1.08^2 + $2,932,500/1.08^3
NPV = $1,102,234