Question
In: Finance
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset...
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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 $403,200 after 3 years. The project requires an initial investment in net working capital of $576,000. The project is estimated to generate $4,608,000 in annual sales, with costs of $1,843,200. The tax rate is 35 percent and the required return on the project is 14 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? |
Solutions
Expert Solution
a)Initial investment = investment in fixed asset+working capital
= 5,200,000+576,000
= $ 5,776,000
b,c,d )
| Year 1 | 2 | 3 | |
| Sales | 4608000 | 4608000 | 4608000 |
| cost | -1843200 | -1843200 | -1843200 |
| Depreciation | -1733160 [5200000*.3333] | -2311400 [5200000*.4445] | -770120 [5200000*.1481] |
| Income before tax | 1031640 | 453400 | 1994680 |
| Less:Income tax | -361074 [1031640*.35] | -158690 [453400*.35] | 698138 [1994680*.35] |
| Net Income | 670566 | 294710 | 1296542 |
| Add:depreciation (non cash) | 1733160 | 2311400 | 770120 |
| Cash flow | 2403726 | 2606110 | 2066662 |
| Working capital recaptured | 576000 | ||
| Net After tax sale value of fixed asset | 396942 | ||
| Total cash flow | 2403726 | 2606110 | 3039604 |
Total depreciation:1733160+2311400+770120=4814680
book value at year3 :5200000-4814680= 385320
gain on sale :403200-385320 =17880
tax on gain :17880*.35 = 6258
After tax sale value =sale value- tax
= 403200-6258= 396942
**depreciation rate can be find from MACRS 3 year table
e)Present value of cash Inflow = [PVA14%,1*cf1]+[PVA14%,2*CF2]+[PVA14%,3*CF3]
= [ .87719*2403726]+[.76947*2606110]+[.67497*3039604]
= 2108524.41+ 2005323.46+ 2051641.51
= 6165489.38
NPV =Present value -initial cost
= 6165489.38-5776000
= 389489.38
**present value can be find from present value table at14%
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