Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.8 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $294,000 after 3 years. The project requires an initial investment in net working capital of $420,000. The project is estimated to generate $3,360,000 in annual sales, with costs of $1,344,000. The tax rate is 32 percent and the required return on the project is 9 percent. (Do not round your intermediate calculations.)

     Required:

What is the project's year 0 net cash flow?

What is the project's year 1 net cash flow?

What is the project's year 2 net cash flow?

What is the project's year 3 net cash flow?

What is the NPV?

Answer 1

		1	2	3	4
	Macrs Rate	33.33%	44.45%	14.81%	7.41%
	x Amount	$             3,800,000	$             3,800,000	$             3,800,000	$ 3,800,000
	depreciation	$             1,266,540	$             1,689,100	$                562,780	$     281,580
	salvage value	$                294,000	A
	Less: Book value	$                281,580
	Gain	$                   12,420
	Tax at 32%	3974.4	B
	Salvage vale net of tax	$          290,025.60	C = A-B
Year	0	1	2	3
Initial cash investment	$                      (3,800,000)
Add: NWC	$                         (420,000)
Total cash outflow	$                      (4,220,000)
Sales		$             3,360,000	$             3,360,000	$             3,360,000
Less: Cost		(1,344,000)	(1,344,000)	(1,344,000)
Less: Depreciation (See above)		$          (1,266,540)	$          (1,689,100)	$              (562,780)
EBT		$                749,460	$                326,900	$             1,453,220
Less: tax at 32%		$          239,827.20	$          104,608.00	$          465,030.40
EAT		$          509,632.80	$          222,292.00	$          988,189.60
Add back depreciation		$       1,266,540.00	$       1,689,100.00	$          562,780.00
OCF		$       1,776,172.80	$       1,911,392.00	$       1,550,969.60
Add: NWC recovery				$          420,000.00
add: salvage value(Net)				$          290,025.60
Total cash flow	$                      (4,220,000)	$       1,776,172.80	$       1,911,392.00	$       2,260,995.20
x DF at 9%	1.0000	0.9174	0.8417	0.7722
Present Value	(4,220,000.00)	1,629,516.33	1,608,780.41	1,745,903.14
NPV					764,199.88
What is the project's year 0 net cash flow?			$          (4,220,000)
What is the project's year 1 net cash flow?			$       1,776,172.80
What is the project's year 2 net cash flow?			$       1,911,392.00
What is the project's year 3 net cash flow?			$       2,260,995.20
What is the NPV?			764,199.88