In: Finance
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $6.4 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $499,800 after 3 years. The project requires an initial investment in net working capital of $714,000. The project is estimated to generate $5,712,000 in annual sales, with costs of $2,284,800. The tax rate is 33 percent and the required return on the project is 10 percent. (Do not round your intermediate calculations.)
Required: (PLEASE TRY AND SHOW CALCULATIONS)
(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?
(a) What is the project's year 0 net cash flow | |||
Investment in Assets | $6,400,000 | ||
Net Working capital | $714,000 | ||
net cash outflow for year 0 | $7,114,000 | ||
Computation of net cash inflows | |||
Year1 | year2 | Year3 | |
Annual sales | $ 51,72,000.00 | $ 51,72,000.00 | $ 51,72,000.00 |
less:Cost of sales | $ 22,84,800.00 | $ 22,84,800.00 | $ 22,84,800.00 |
$ 28,87,200.00 | $ 28,87,200.00 | $ 28,87,200.00 | |
less: depreciation | $ 21,33,120.00 | $ 28,44,800.00 | $ 9,47,840.00 |
Net income | $ 7,54,080.00 | $ 42,400.00 | $ 19,39,360.00 |
Less: tax 33% | $ 2,48,846.40 | $ 13,992.00 | $ 6,39,988.80 |
Net income after tax | $ 5,05,233.60 | $ 28,408.00 | $ 12,99,371.20 |
Add: depreciation | $ 21,33,120.00 | $ 28,44,800.00 | $ 9,47,840.00 |
Net cash Inflows | $ 26,38,353.60 | $ 28,73,208.00 | $ 22,47,211.20 |
Deprecaition computation | Year1 | year2 | Year3 |
dpreciation base | $6,400,000 | $6,400,000 | $6,400,000 |
Depreciation rate | 33.33% | 44.45% | 14.81% |
deprecaition | $ 21,33,120 | $ 28,44,800 | $ 9,47,840 |
(b) What is the project's year 1 net cash flow? | |||
Year 1 net Cash inflow =$2638,353.60 | |||
( C) What is the project's year 2 net cash flow? | |||
Year 2 net Cash inflow =$2873,208 | |||
( D) What is the project's year 3 net cash flow? | |||
Amount in $ | |||
Salvage value | 499800 | ||
Less: Book Value of the asset | 474240 | ||
25560 | |||
tax at33% ($25560*0.33 | 8434.8 | ||
Book value after 3 years =$6400,000- ($2133120+$2844800+$947,840)=$474,240 | |||
year 3 Net cash flow | Amount in $ | ||
Operating cash flow | $ 22,47,211.20 | ||
Working capital | $ 7,14,000.00 | ||
Salvage value | $ 4,99,800.00 | ||
less: tax on salvage value | $ -8,434.80 | ||
Net cash inflow | $ 34,52,576.40 | ||
(e ) Computation of Net present value | |||
Year | Cash inflow | PV factor at 10% | Present value of cash flow |
1 | $ 26,38,353.60 | 0.90909 | $ 23,98,503.27 |
2 | $ 28,73,208.00 | 0.82645 | $ 23,74,552.07 |
3 | $ 34,52,576.40 | 0.75131 | $ 25,93,971.75 |
$ 73,67,027.09 | |||
Less: initial cash outflow | $ 71,14,000.00 | ||
Net Present value | $ 2,53,027.09 | ||
Project Net present Value is Positive , so the project recommended | |||