Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.726 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 $289,800. The project requires an initial investment in net working capital of $414,000. The project is estimated to generate $3,312,000 in annual sales, with costs of $1,324,800. The tax rate is 30 percent and the required return on the project is 17 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

(a)	Project's year 0 net cash flow				$       -41,40,000
Working:
	Investment in Fixed Asset				$         37,26,000
	Investment in net working capital				$           4,14,000
	Year 0 cash flow				$         41,40,000
(b)	Project's year 1 net cash flow				$         17,63,640
Working:
	Straight line depreciation			=	(Cost -salvage value)/Useful Life
				=	(3726000-0)/3
				=	$         12,42,000
	Annual Sales				33,12,000
	Cost of sales				-13,24,800
	Depreciation				-12,42,000
	Profit before tax				7,45,200
	Tax				-2,23,560
	Net Income				5,21,640
	Depreciation				12,42,000
	Cash flow				17,63,640
(c)	Project's year 2 net cash flow				$         17,63,640
(d)	Project's year 3 net cash flow				$         23,80,500
	Working:
	After tax sale proceeds of asset			=	289800*(1-0.30)
				=	2,02,860
	After tax sale proceeds of asset				2,02,860
	Release of net working capital				4,14,000
	Operating cash flow				17,63,640
	Total Cash flow				23,80,500
(e)	NPV				$     1,42,061.64
	Working:
	Year	Cash flow		Discount factor	Present Value
	0	$ -41,40,000		1.0000	$ -41,40,000.00
	1	17,63,640		0.8547	15,07,384.62
	2	17,63,640		0.7305	12,88,362.92
	3	23,80,500		0.6244	14,86,314.11
		NPV			1,42,061.64