Question

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?

Answer 1

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