Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.2 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $407,400 after 3 years. The project requires an initial investment in net working capital of $582,000. The project is estimated to generate $4,656,000 in annual sales, with costs of $1,862,400. The tax rate is 33 percent and the required return on the project is 16 percent. (Do not round your intermediate calculations.)

    

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)	What is the project's year 0 net cash flow?				$       -57,82,000
(b)	What is the project's year 1 net cash flow?				$         24,43,655
(c)	What is the project's year 2 net cash flow?				$         26,34,474
(d)	What is the project's year 3 net cash flow?				$         31,07,965
(e)	What is the NPV?				$           2,73,584
Workings:
Year				0	1	2	3		Total
Investment in fixed asset				-52,00,000
Investment in net working capital				-5,82,000
Annual Sales					46,56,000	46,56,000	46,56,000
Cost of goods sold					-18,62,400	-18,62,400	-18,62,400
Depreciation Expenses					-17,33,160	-23,11,400	-7,70,120
Profit Before Tax					10,60,440	4,82,200	20,23,480
Tax Expense					-3,49,945	-1,59,126	-6,67,748
Net Income					7,10,495	3,23,074	13,55,732
Depreciation Expenses					17,33,160	23,11,400	7,70,120
Operating cash flows					24,43,655	26,34,474	21,25,852
After tax sale of fixed asset							4,00,114
Release of net working capital							5,82,000
Total Cash flows				-57,82,000	24,43,655	26,34,474	31,07,965
Discount factor				1.0000	0.8621	0.7432	0.6407
Present Value				-57,82,000	21,06,599	19,57,843	19,91,142		$       2,73,584
Working:
a.	Depreciaton Schedule:
	Year	Cost	Depreciation rate		Depreciation expense		Accumulated Depreciation expense		Book Value
	1	52,00,000	33.33%		17,33,160		17,33,160		34,66,840
	2	52,00,000	44.45%		23,11,400		40,44,560		11,55,440
	3	52,00,000	14.81%		7,70,120		48,14,680		3,85,320
b.	Sales Price after 3 years				4,07,400
	Less Book Value at the end of Year 3				3,85,320
	Profit on sale				22,080
	Tax on profit				7,286
	after tax sale proceeds				4,00,114