Question

Winter Tyme, Inc., produces coats and jackets for the Seattle market. The company is considering a new 3-year expansion project into the Portland market. The expansion requires an initial investment of $3.402 million in new plant and equipment. These assets will be depreciated straight-line to zero over its 3-year tax life, after which time the assets can be sold for $264,600. The expansion also requires an initial investment in net working capital of $378,000, but this investment will be recovered at the end of the project's life. The project is estimated to generate $3,024,000 in annual sales, with costs of $1,209,600. The tax rate is 31 percent and the required return on the project is 16 percent.

  

Required:
(a)	What is the project's start-up cost, the year 0 cash flow from assets? Hint: this typically doesn't include OCF.
	(Click to select)-3,591,000-3,402,000-3,969,000-3,780,000-4,158,000

  

(b)	What is the project's year 1 cash flow from assets?
	(Click to select)1,443,1281,523,3021,763,8241,603,4761,683,650

  

(c)	What is the project's year 2 cash flow from assets?
	(Click to select)1,763,8241,523,3021,443,1281,683,6501,603,476

  

(d)	What is the project's year 3 cash flow from assets?
	(Click to select)2,055,8482,380,4551,947,6452,164,0502,272,253

  

(e)	What is the NPV?
	(Click to select)1,457,637189,384-623,787180,366199,230

Answer 1

(a) Start up cost is equal to the initial investment and additional working capital, that is, 3,402,000 + 378,000

= 3,780,000

(b) Calculation of year 1 cash flow

	Particulars	Amount
	Sales	3,024,000
Less:	Cost	1,209,600
	Gross Profit	1,814,400
Less	Depreciation (3,402,000/3)	1,134,000
	Net Profit	680,400
Less:	Tax (31%)	210,924
	Profit after Tax	469,476
Add:	Depreciation	1,134,000
	Cash Flow	1,603,476

(c) Cash flow in year 2 will be same as in year 1, that is, 1,603,476

(d) Calculation of year 3 cash flow

	Particulars	Amount
	Profit after depreciation as calculated in point (b)	680,400
Add:	Proceeds from sale of asset	264,600
	Net Profit	945,000
Less:	Tax (31%)	292,950
	Profit after tax	652,050
Add:	Depreciation	1,134,000
Add:	Release of working capital	378,000
	Cash flow	2,164,050

(e) Calculation of NPV

Year	Cash Flow	Present Value Factor	Present Value
0	-3,780,000	-	-3780,000
1	1,603,476	1/1.16 = 0.862	1,382,307
2	1,603,476	1/(1.16)^2 = 0.743	1,191,644
3	2,164,050	1/(1.16)^3 = 0.641	1,386,415
		Net Present Value	180,366