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 $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 11 percent. (Do not round your intermediate calculations.) |
| Required: | |
| (a) | What is the project's year 0 net cash flow? |
| (Click to select)-2,850,146-6,758,300-6,402,600-2,700,138-7,114,000 | |
| (b) | What is the project's year 1 net cash flow? |
| (Click to select)2,850,1463,300,1693,000,1542,700,1383,150,161 |
| (c) | What is the project's year 2 net cash flow? |
| (Click to select)3,235,0082,700,1383,073,2583,150,1613,396,758 |
| (d) | What is the project's year 3 net cash flow? |
| (Click to select)3,814,3763,432,9393,623,6583,150,1614,005,095 |
| (e) | What is the NPV? |
| (Click to select)1,003,485.291,053,660953,311836,13314,445,692 |
Solutions
Expert Solution
a)Initial investment : 6,400,000 +714,000 working capital =- $ 7114000
correct option is " e"
b)
| Year 1 | 2 | 3 | |
| sales | 5712000 | 5712000 | 5712000 |
| less:cost | (2284800) | (2284800) | (2284800) |
| Depreciation | (2133120) [6400000*.3333] | (2844800) | (947840) |
| Income before tax | 1294080 | 582400 | 2479360 |
| less:Tax | (427046.4) [1294080*.33] | (192192) | (818188.8) |
| Net Income | 867033.6 | 390208 | 1661171.2 |
| Add:Depreciation (non cash) | 2133120 | 2844800 | 947840 |
| working capital realised | 714000 | ||
| after tax sale of asset | 491365.2 | ||
| cash flow | 3000153.64 | 3235008 | 3814376. |
**gain on sale = sale value -book value
= 499800- [6400000*.0741]
= 499800-474240
= 25560
tax on sale :25560*.33 = 8434.8
after tax sale value = 499800-8434.8 = 491365.2
b)correct option is "C" 3000154
c)correct option is "a"
d)"a"
e)present value of cash flow =[PVF11%,1*CF1]+[PVF11%,2*CF2]+[PVF11%,3*CF3].
= [.90090*3000153.64]+[.81162*3235008]+ [.73119*3814376.]
= 2702838.41+ 2625597.19+2789033.59
= 8117469.19
NPV= Present value -initial cost
= 8117469.19-7114000
= 1003469.19
correct option is "A" -1003485
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