Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.97 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 $231,000. The project requires an initial investment in net working capital of $330,000. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 33 percent and the required return on the project is 13 percent.

  

Required:
(a)	What is the project's year 0 net cash flow?
	(Click to select)  -3,630,000  -3,300,000  -3,135,000  -2,970,000  -3,465,000

  

(b)	What is the project's year 1 net cash flow?
	(Click to select)  1,249,182  1,387,980  1,318,581  1,457,379  1,526,778

  

(c)	What is the project's year 2 net cash flow?
	(Click to select)  1,457,379  1,526,778  1,318,581  1,249,182  1,387,980

  

(d)	What is the project's year 3 net cash flow?
	(Click to select)  1,966,388  1,685,475  1,779,113  2,060,025  1,872,750

  

(e)	What is the NPV?
	(Click to select)  1,302,982  313,203  307,233  328,863  -612,684

Answer 1

- Initial Fixed Investments =$2.97 million

Initial Investment in working capital = $330,000

a). Project's year 0 net cash flow = Initial Fixed Investments + Initial Investment in working capital

=$2,970,000 + $330,000

=$3,300,000

Hence, Option B. -$3,300,000

- Depreciation of Fixed Assets = Initial Fixed Investments/Assets life

=$2970,000/3years

= $990,000

Computing the Project's year Net Cash flow:-

Particular	Year 1	Year 2	Year 3
Annual Sales	2640,000	2640,000	2640,000
Less: Costs	(1056,000)	(1056,000)	(1056,000)
Less: Depreciation	(990,000)	(990,000)	(990,000)
Income before Tax	594,000	594,000	594,000
Less: Tax Rate@33%	(196,020)	(196,020)	(196,020)
Net Income	397,980	397,980	397,980
Add: Depreciation	990,000	990,000	990,000`
Cash Flow after tax	1387,980	1387,980	1387,980
Add: Initial Net working capital	0	0	330,000
Add: After tax salvage Value [$231,000*(1-0.33)]	0	0	154,770
Net Cash flow of project	1387,980	1387,980	1872,750

(b) Project's year 1 net cash flow = $1387,980

Hence, Option B

(c) Project's year 2 net cash flow = $1387,980

Hence, Option E

(d) Project's year 3 net cash flow = $1872,750

Hence, Option E

e). Calculating the NPV of the Project:-

Year	Net Cash Flows of Project ($)	PV Factor @13.00%	Present Value Net Cash Flows of Project ($)
0	(3,300,000.00)	1.0000	(3,300,000.00)
1	1,387,980.00	0.8850	1,228,300.88
2	1,387,980.00	0.7831	1,086,991.93
3	1,872,750.00	0.6931	1,297,909.69
			313,202.51

So, NPV of the Project is $313,202.51

Hence, Option B. $ 313,203

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