Question

In: Finance

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset...

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?

Solutions

Expert Solution

(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

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