Question

Fun With Finance is considering a new 3-year expansion project that requires an initial fixed asset investment of $6.318 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 $491,400. The project requires an initial investment in net working capital of $702,000. The project is estimated to generate $5,616,000 in annual sales, with costs of $2,246,400. The tax rate is 34 percent and the required return on the project is 15 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)  -7,020,000  -6,669,000  -6,318,000  -7,722,000  -7,371,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)  3,086,975  2,645,978  2,939,976  2,792,977  3,233,974

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)  2,645,978  2,939,976  3,086,975  2,792,977  3,233,974

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)  4,164,615  3,767,985  4,362,930  3,966,300  3,569,670

  

(e)	What is the NPV?
	(Click to select)  2,758,049  385,824  367,452  -1,309,807  394,627

Answer 1

Time line		0	1	2	3
Cost of new machine		-6318000
Initial working capital		-702000
=Initial Investment outlay		-7020000
						100.00%
Sales			5616000	5616000	5616000
Profits	Sales-variable cost		3369600	3369600	3369600
-Depreciation	Cost of equipment/no. of years		-2106000	-2106000	-2106000	0	=Salvage Value
=Pretax cash flows			1263600	1263600	1263600
-taxes	=(Pretax cash flows)*(1-tax)		833976	833976	833976
+Depreciation			2106000	2106000	2106000
=after tax operating cash flow			2939976.00	2939976.00	2939976
reversal of working capital					702000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				324324
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					1026324
Total Cash flow for the period		a.-7020000	b.2939976.00	c.2939976.00	d.3966300.000
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875
Discounted CF=	Cashflow/discount factor	-7020000	2556500.87	2223044.234	2607906.633
e. NPV=	Sum of discounted CF=	367452