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In: Finance

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset...

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.076 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 $394,800. The project requires an initial investment in net working capital of $564,000. The project is estimated to generate $4,512,000 in annual sales, with costs of $1,804,800. The tax rate is 33 percent and the required return on the project is 9 percent. 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?

Solutions

Expert Solution


Year

Cash outflows

Cash inflows

Depreciation = D = 5076000/3

Net Working capital = NWC

Net Cash flows = Cash outflow + NWC

Discount factor = Df = 1/(1+Rate)^Year

Present Values

0

-5076000.00

0.00

-564000.00

-5,640,000.00

1.000000

-5,640,000.00

Co

Ci

D

NWC

Net Cash flow = (Co+Ci-D)x(1-33% )+D+NWC

Df = 1/(1+9%)^Year

Df x Net Cash flows

1

-1,804,800.00

4,512,000.00

1692000.00

2,372,184.00

0.917431

2,176,315.1393

2

-1,804,800.00

4,512,000.00

1692000.00

2,372,184.00

0.841680

1,996,619.8291

3

-1,804,800.00

4,906,800.00

1692000.00

564,000.00

3,200,700.00

0.772183

2,471,526.1281

Total = NPV =

1,004,461.10

Year 3 Cash inflows = Annual sales + Market value of fixed asset at year 3 = 4,906,800.00

Year 1 Net cash inflow =

2,372,184.00

Year 2 Net cash inflow =

2,372,184.00

Year 3 Net cash inflow =

3,200,700.00

NPV = $1,004,461.10


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