Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.24 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 $252,000. The project requires an initial investment in net working capital of $360,000. The project is estimated to generate $2,880,000 in annual sales, with costs of $1,152,000. The tax rate is 35 percent and the required return on the project is 16 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)  -3,960,000  -3,240,000  -3,600,000  -3,420,000  -3,780,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)  1,501,200  1,651,320  1,576,260  1,351,080  1,426,140

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)  1,651,320  1,501,200  1,426,140  1,351,080  1,576,260

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)  2,025,000  1,822,500  2,126,250  2,227,500  1,923,750

  

(e)	What is the NPV?

Answer 1

Answer:

We calculate below cash flows from year 0 to Year 3 and NPV:

Answer (a)

Correct answer is:

-3,600,000

Answer (b)

Correct answer is:

1,501,200

Answer (c)

Correct answer is:

1,501,200

Answer (d)

Correct answer is:

  2,025,000

Explanations of all of above:

As calculated and given in table above.

Answer (e)

NPV = $107,105.87