Question

1. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.616 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $436,800. The project requires an initial investment in net working capital of $624,000. The project is estimated to generate $4,992,000 in annual sales, with costs of $1,996,800. The tax rate is 31 percent and the required return on the project is 11 percent.

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? 2. A 6-year project has an initial fixed asset investment of $42,000, an initial NWC investment of $4,000, and an annual OCF of -$64,000. The fixed asset is fully depreciated over the life of the project and has no salvage value.    Required: If the required return is 19 percent, what is the project's equivalent annual cost, or EAC? (Do not round your intermediate calculations.)

Answer 1

1.

Value of initial Investment, annual cash flow and NPV of project at 11% discount rate is calculated in excel and screen shot provided below:

project's year 0 net cash flow is $6,240,000.

project's year 1 net cash flow is $2,647,008

project's year 2 net cash flow is $2,647,008

project's year 1 net cash flow is $3,572,400

NPV of project is $905,171.06 and IRR is 18.75%

Since, NPV of project is a positive value, so project should be accepted.