Question

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 33 percent and the required return on the project is 17 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)-6,240,000-5,616,000-6,864,000-6,552,000-5,928,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)2,493,3172,886,9982,624,5442,755,7712,362,090

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)2,362,0902,493,3172,886,9982,755,7712,624,544

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)3,541,2003,895,3203,187,0803,718,2603,364,140

  

(e)	What is the NPV?

Answer 1

Initial Investment = $5,616,000
Useful Life = 3 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $5,616,000 / 3
Annual Depreciation = $1,872,000

Initial Investment in NWC = $624,000

Salvage Value = $436,800

After-tax Salvage Value = $436,800 * (1 - 0.33)
After-tax Salvage Value = $292,656

Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($4,992,000 - $1,996,800) * (1 - 0.33) + 0.33 * $1,872,000
Annual Operating Cash Flow = $2,624,544

Answer a.

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$5,616,000 - $624,000
Net Cash Flows = -$6,240,000

Answer b.

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $2,624,544

Answer c.

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $2,624,544

Answer d.

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $2,624,544 + $624,000 + $292,656
Net Cash Flows = $3,541,200

Answer e.

Required return = 17%

NPV = -$6,240,000 + $2,624,544/1.17 + $2,624,544/1.17^2 + $3,541,200/1.17^3
NPV = $131,485.97